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Executives

Michel Liès - Group CEO

Christian Mumenthaler - CEO Reinsurance

Matthias Weber - Chief Underwriting Officer

Analysts

Fabrizio Croce - Kepler Cheuvreux

Cameron Husain - RBC Capital Markets

Thomas Seidl - Sanford Bernstein

Swiss Re (OTC:SWCEY) Presentation Call September 9, 2013 8:00 AM ET

Operator

Ladies and gentleman, good morning or good afternoon. Welcome to the Swiss Re's Investor and Media Meeting at Monte Carlo 2013. I am Zoya, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation there will be a Q&A session. (Operator Instructions) The conference must not be recorded, fabrication or broadcast. At this time it's my pleasure to hand over to Mr. Michel Lies, Group CEO. He will now be going into the conference room.

Michel Liès

Welcome to those of you in the room here in Monte Carlo and also for those of you joining us via telephone on this investors and media meeting of the 57th Rendezvous of Monte Carlo. My name is Michel Liès; I am the Group CEO of Swiss Re. Our agenda this afternoon is first of all that I will make a few introductory remarks, then I will hand over to Christian Mumenthaler, CEO of our Reinsurance unit and Matthias Weber, our Chief Underwriting Officer to talk about the current outlook for the market and I will differentiate to our knowledge. I will then conclude with the outlook and after the presentation we'll have time for Q&A.

Indeed this year is very special for us. This year is 150th anniversary of Swiss Re. We can see on the next slide how it holds down. On the left side of this slide you see our first treaty. Swiss Re's first marine reinsurance treaty was concluded with Helvetia Allgemeine, Helvetia General in St. Gallen, one of Swiss Re's founding company. The treaty was signed on the 31st of December, 1863 and became effective as of January 1, 1864.

On the right side of the slide you see our first Farmville office in the heart of Zurich. Staying for a little moment with the team of our 150th anniversary and you'll see in the course of the presentation that we're not being nostalgic, but we have a real point to make about our long corporate life. Let's move to the next slide.

Slide five, and watch a short video clip that takes you on a very short journey throughout our history.

[Audio Video Presentation]

150 years. Our next slide, Slide 6 I would like to spend a moment to introduce you to the generation of teams that we introduced with our anniversary this year. Obviously what is even more important than looking into the past is looking into the future, not necessary into next 150 years but also the next decade to be more precise? To do so, we conducted global risk perception survey the largest of its kind ever. Based on the findings we turn our focus on four strategically important topics. Let me list them up to you and provide a bit of additional color to them, based on the survey results.

Advancing sustainable energy solutions, we found out that large majorities of all emerging market are willing to use renewable power. On the other hand some large industry like [indiscernible] lag behind in matter of privatization of these solutions. Spending longer life; all the people are more concerned about aging society than the younger generation. But for the younger generation will eventually ask what's the deal, maybe the concern of the elders is that they don't want to pay. And therefore solutions are needed and they are needed now.

Managing climate in that sort of risk and as we ensure this is one of our core strengths, we help people, businesses our government cope with the financial burden of catastrophic risks such as earthquake, floods or storms. And based on the proportion of these academic claims which is really covered by the insurance industry there is still a lot to do in this segment.

Partnering for food security, hunger is still a major issue in both the developed and developing world. Even in some Western European countries that go into this survey approximately one in 10 say that he or she went hungry without enough food to eat at least once if not more in the last year.

So these are four themes for which for some of them at least the contribution of the insurance and reinsurance industry is not obvious but here we altogether have for sure a role to play.

Before concluding with this short introduction let's move to something more directly concrete. The next slide, Slide 7, will look familiar to many of you because it was the slide that I present one of my key slides in our Investors Day earlier this year. Of course here in Monte Carlo our focus is on property and casualty and we expect the successful renewal of attractive rate levels to continue. And we expect net premium growth from expiry of the major quarter share on our P&C business last year.

With that I just would like to hand over to Christian Mumenthaler, who will talk about the current outlook for the market and how we differentiate through our knowledge.

Christian Mumenthaler

Thank you, Michel. From Page 9 and please don't read too much into the fact that I start the current market environment section with an advertisements of the great depression. So I put it up here because I like this, it was published in New York, this was from 1934 and this is the balance sheet and once we proved that we were strong and the environment of this was extremely difficult in '31, the British pound has been devalued, so there was a bit of a currency war, the dollar was devalued in '33 one year before that and we have the loss as a consequence of that. So to prove that we're strong we published some advertising in the U.S. and this is one of them. just shows I think more important than anything the resilience of what Swiss Re went through its 150 years not just World Wars but extreme situations like the great depression.

So on Page 10 I have the slide I had last year, the last year we looked at the three year outlook with the different factors and the way of reviewing it is that prices will go higher over a year. And the different factors were, there were two factors leading to higher prices but as the low interest rates and the regulatory change we see all over the world and into it some factors that in the last few years have led to lower prices and that's low inflation which translates into low claims inflation, just the overall industry capitalization which has been up and the continuous reserve releases.

And in the middle Nat Cat with a big question mark so very much depends on how the Nat Cat cash situation developed. So as a summary of what has happened since last year if I go quickly through the different factors you see on the low interest rate I would say more or less stable obviously in the last few weeks we have an increase in interest rates but it all had come down since last Monte Carlo's I think overall historically we're in a very low interest rate environment still.

Regulatory changes, there were some delays in Solvency II but that affected only part of Europe. overall in the world we still see huge activity in the whole regulatory sector and generally going towards more economic systems. So we would say this is all unchanged. So the first in the change here really natural catastrophe with a question mark, obviously there was no big event since last Monte Carlo, Sandy was an average size event, so this is negative for price development.

On the reserve lead side you don't get data precise data from all the countries but the U.S. which is the very important country for casualty. We continue to see a decline in reserve releases so there are still reserve releases but they get smaller and smaller and eventually they would be zero or negative. So that's a positive pressure point. Low inflation remains very low currently but this is a semester grid as I said last time so I think it's much more likely to go up in the next five years than down.

And industry capitalization is linked to natural catastrophe, so negative factor at this point in time. So as a result of all of that Matt Weber will then go through the different lines but overall the message we think is that the Nat Cat will go down in 2014. We expect it to stabilize then and then other lines should be more or less stable, some of them even increasing. But there is a lot talk around here as around alternative capital, what it means to the industry, we use big words like tsunami of capacity et cetera. So with those it would be interesting for everybody to hear our view on that.

And Matt Weber will lead us through some truths and myths of alternative capital.

Matthias Weber

Thank you, Christian. So actually our first alternative capital is entering the Nat Cat reinsurance market and also the recession market. Approximately 40% of this alternative capital is provided by ILS, via Insurance Linked Securities. Almost 50% of it is provided by collateralized reinsurance. ILW insurance claims warranties and sight costs amounts to relatively small amounts compared to ILS and collateralized reinsurance.

Typically, the following investors or investor types provide the capacity its hedge funds, asset managers its dedicate ILS funds and that has happened over before many years actually and as of recently also pension funds have entered the area. And of course Nat Cat right now in the low interest environment where everybody is wondering where can I invest, where should I invest, without taking too much risk Nat Cat is an opportunity which still provides actually pretty good returns not only to reinsurance but also to investors and that's the reason why we are faced now with capacity and with competition from the capital markets.

This alternative capacity in order for it to be deployed requires some boundary conditions to be fulfilled; one is this capacity like short tails, like transparency, it likes low entry barriers and of course everybody likes high margins, who would not. That's the reason why right now its alternative capacity is 70% of it is focusing on the United States Nat Cat, approximately a quarter of it is provided for European reinsurance and only 5% approximately covers the rest of the world including all other plants. So it's basically a U.S. Nat Cat rate, it's okay we take questions at the end. Okay.

And one-third of the capacity is offered reinsurance companies so it's the equivalent of retrocession capacity approximately two-thirds is offered to insurance company and of course everybody is wondering not only but also hearing Monte Carlo is this capacity meant to stay or will it go away and probably everybody has, his or her own opinion on this. Our opinion is, a good amount of the capacity is probably here to stay maybe not all of the capacity if interest rates go up if other investment opportunities become attractive again relative to Nat Cat we believe some of this capacity will move away will switch over. In addition to that a big portion of the capacity has not been tested by a big Nat Cat event and we believe when the big hammer comes down some of the capacity might also go away.

One thing which is rarely talked of but it's very important is the fact that this alternative capacity is collateralized and this is important because it provides security to the insured, other insurance company who takes into hedge but it's also important because this means after the big event, collaterals have to stay in place for a while in order to be available in case of adverse development which actually means the collateral -- the capacity behind the collaterals is not available to be redeployed right off the big event. That is interesting for us all to be aware of because it's not being discussed very frequently. So right now the total amount of capacity and please accept this is not exact science, we have to take some guesses but we believe the total amount of capacity amounts to US40 billion and it has increased over the last two years and the majority of the increase actually came from collateralized reinsurance.

I would like to draw your attention to the graph on the right hand side it shows basically the ratio between the total amount of capital from the alternative markets that is dedicated to the United States for U.S. Cats relative to the total amount of Cat capacity that U.S. insurance companies are buying. That basically shows which portion of the total amount of Cat capacity goes into the alterative markets. And the half year after this increase in 2013 a ratio 22% and if you look in 2007 we have also 22% and interestingly enough right now it's a topic here in Monte Carlo, it's a topic in the trade press, in the media, I do not remember that the topic got the same attention in 2006-2007 but if you look at this graph we have to say, we have seen it before, we have done it, we have learned how to deal with it.

Of course everybody is interested in price levels and how do they evolve and what's the future outlook. What you see here on the left hand side are basically the spreads of Cat bonds that are traded in the secondary markets. And these spreads we have to adjust them for seasonality in order to provide a neutral but fair picture. And these spreads give a pretty good indication for where the price level is of capacity provided by alternative markets. What we see here is that the spread has been volatile overtime, that gone up and down depending on demand and supply characteristics. We also see which is what everybody is writing about that price levels have decreased by approximately 30% over the last 12 months, but something which is rarely mentioned however we believe it is important for us and also for the outlook is the observation that if we sum in price levels have been incredibly stable since April 2013.

So over the last -- because we feel this is so important, please allow me to repeat it, over the last five months, price levels provided by capital market capacity have been stable. In addition to that if you look at the interest rates, they are still very low, chances that they are going to increase are probably or possibly a bit higher than chances that interest rate are decreasing in which case if they increase the relative attractiveness of Nat Cat for investors would decrease, so on the basis of this we derive the conclusion that at least for a certain amount price levels in the alternative marketplace have found a minimum -- a local minimum.

The second point which I would like to get across is we have seen relatively big increases of Nat Cat capacity in the past. We believe this is a long-term trend and we believe it will continue also in the future. So growth in Nat Cat will in our opinion probably exceed growth of GDP, and the reasons are; first, we have just the natural growth coming from growth in the economic values. On top of this, we have a trend of more and more people moving into cities so urbanization will continue to happen, what this means for Nat Cat is that big events will actually even become bigger and more expensive for the industry. In emerging markets, we are seeing a growing middleclass and we all know middleclass will actually move into the insurance space and buy insurance coverage.

And on top of this, we also see maybe weaker but nevertheless important long-term trends that governments have a tendency to start thinking and in some cases also seeking risks into the private sector and Nat Cat risk is one of the key risks which governments like to see if they see and also regulation has a tendency on a global basis to become more economic and risk-based and this means we will probably see more opportunities in Nat Cat insurance and reinsurance. So derived from these observations, I would like to offer you the following outlook.

We are seeing an increase of alternative capacity. We have seen stable ILS spreads over the course of the last five months. Exposure will continue to grow and probably faster than GDP growth. On the basis of this, we believe Nat Cat's reinsurance demand will continue to increase and Nat Cat rates are probably experiencing stabilization sometimes in 2014 because alternative market has stabilized already. Special lines there, our dominating trends are, we're seeing more and more growth and insurance risks moving towards high growth markets, but also mature markets of course are recovering and the economic outlook is slowly but surely improving there as well.

This is very important for special lines because special lines meaning reengineering agriculture and price cutting and surety are very sensitive to economic growth then economic growth accelerates these lines will experience an above average increase as well. Price levels, we feel in these areas will be flat. There is a good balance between demand and supply right now, and we expect this will continue at least in the short-term.

On the liability side of course the environment is still dominated by very low interest rates. One thing is important to mention Christian has mentioned it already we're still seeing reserve releases in the industry; however, the releases are slowing down. The releases are getting less and less. So, little bit hard to estimate when this kind of excess research is empty. We have been wrong in the past making a prediction there, so I'm not making a predication anymore. The only thing I would like to offer here is this year we are probably 12 month closer it through the anti-excess reserve release situation done 12 months ago, it's probably as much as I can say right now.

So, on the basis of this right now, we are seeing bits where market prices are hardening for instance U.S. primary insurance which is a big segment actually of global casualty, we are seeing areas where the opposite is happening, slight softening on average probably plus minus flat. We believe we will see growth rate increases once the excess reserves are depleted and on the motor side we are seeing exposure growth mostly driven by broadening of coverage as in some markets. I would like to mention here especially their periodic payment orders which are well known to have increased in importance in UK, but also in some other markets we are seeing an increase here. But also in motor on a global basis we feel demand and supply is pretty much balanced and therefore our price expectation on average is flat with some differences from market-to-market.

Michel Liès

Thank you, Matt. I'll go through the next section which is about differentiation. So all of this alternative capacity is obviously a challenge for the industry, but like every challenge it also has opportunities and the way we look at the opportunity is that it helps us to refocus on our strength which is that we are very different than just capacity. We're not just capacity about the risk we are there for clients who provide solutions et cetera. So, before I go into that chapter I have my preferred artifacts from our 150 years of history and you can see it in our Swiss Re pavilion if you come by, is a postcard, there is a postcard that was sent the 9th February, 1918 by a client manager from a ship. What you see on the postcard is a ship, it's actually the Infanta Isabel De Borbon and the client manager was writing to the CEO who was going to Brazil and he wrote, we're getting to Las Palmas today, she is a really good ship, very comfortable and satisfactory in every way. We will reach Buenos Aires about the 24th. That's nearly 100 years ago, people were going to Brazil already on a steam boat.

I am not sure I know how practically you did pay claims and things like that but the people were just dragging along a copper with U.S. dollars or Swiss francs, but its remarkable that we could celebrate 100 years of Latin America last year, it's a long, long history. Hence, it obviously has a point of what I want to make is the, there is differentiations for history, I mean 150 years old only a very tiny minority of current survive 150 years and this is a very long tailed business.

So last year the oldest claims we paid were from 1950. They read contract in 1950, at last year we paid hopefully the last claims on these treaty so 60 years it's a third of our existence. So, if you are a client and you want to do business and you have a long tailed business in particular, you just look at the current ratings as a double A Swiss Re, double A hedge funds or do you think maybe there is more to that, maybe there is a DNA in companies like Swiss Re that makes them survive for a very long time. And there is definitely some of that second aspect in your ability to survive all kinds of crises that makes Swiss Re more valuable to do reinsurance with and that exists for two years.

But there is not just history, we also have a unique access to clients, there are some clients we celebrated this year, 100 years uninterrupted reinsurance and we have the original contact from 100 years ago and it of course creates emotional link. So, we are one of the few companies who have direct access to clients 50% of our business is direct, 50% for the brokers depending on the choice of the clients and when we are not just there once a year to renew the treaties we're there all over the year, for district companies we have near about 1,200 interactions per year so five heavy working days for these big companies all across the world. So, all during the year five times a day we help North district companies not just for company across their hundreds of legal entities across the world. So, it's a constant knowledge exchange, we did our products together, we restructure reinsurance, we help them with the local strategy et cetera, et cetera.

So, that's the space we question, we have published a year ago, this is an updated chart here. You can see that the profits distribution we had in our global physician so that's all the big, the profit distribution of the January '13 renewal, the 38% you see here the grey part that's the open market placements so this is where we compete with everybody else. And the other parts of more than half of the profits come from unique transactions, the placements renewed single year deals, new single years deals or multiyear deals, it's a highly structured complex solution which means that our business more or less shifted 15 years ago will be 100% open market place and probably so that shifted quite a lot because we need to bring all these things to work, all the value created to the clients is brought to work and it's actually working.

So on my last slide I wanted to make a comparison more from a strategic point of view how we see ourselves so as you can see, all big diversified reinsurers, non-diversified reinsurers so startups, one line, mono liners et cetera, and alternative capital and there's a role each one can play. So if you go through that list for a second and you look at capital raising capacity, there's definitely alternate capital is extremely fast in raising capital, so very efficient.

Second point is access to business, so it's a global access, global physical presence and here a company like Swiss Re which is everywhere, has an advantage. On the product offering side the large diversified players also have advantage because you can play all lines of business, P&C, Life & Health in all the countries in the world. On the value-added services, this is probably the one that totally distinguishes us from the rest, so this is the underwriting manuals we get to clients, the common product development and knowledge sharing et cetera, that's really something you can only offer if you're a very large diversified reinsurer. Risk selection we believe we have an advantage because we have our own tools we have our own scientists we tried to have our view about the risks such as the public model, with full optimization we think it's probably -- it really has to see an advantage and then obviously as a consequence of some of that above on the operational cost side big players like us would have a disadvantage because we have all these other things. You can see how the different players could play different roles in a future reinsurance market and how our focus must be around the knowledge company and the differentiator.

I'll hand over to Matt to discuss more of these value-added services, to give you some examples, a focus on Nat Cat, because there's dozens of services we do, and I hope Matt can you a sense of the kind of offerings we have.

Matthias Weber

Okay, so one of the examples is called CatNet, CatNet is Swiss Re's online Nat Cat information and mapping tool and it's actually in my opinion a pretty cool website which I will show a little demo off, it combines Nat Cat's asset information with maps, with Google Maps and also with satellite imagery and it facilitates the assessment of individual risks and small localized portfolios and it is something which some of our clients, some of our insurance clients actually use and are integrating or have integrated in their day-to-day underwriting already. I will show you a one and a half minute demo.

[Audio Video Presentation]

Okay, these were a couple of examples, here is another example which is not part of the video we made after the Calgary flood which was a major event during Q2, and we made a comparison between the area which was actually flooded and our calculated 100 year flood plains as made available to our clients via CatNet. And you see here in many areas there is a very good agreement between the blue area and the red area and this shows a little bit the value that is provided by these online tools. But CatNet is one of a very big number of examples, we have other tools and other services for instance we provide training pretty much in all lines of business. We have other tools for instance in the area of weather index business we do have also an online risk assessment tool, we have an underwriting tool for engineering risks which we are making available to our clients. We are working with clients on coming up with new and innovative products on the direct insurance side which they can sell and we are providing reports which benchmark individual clients compared to the markets. So if I could summarize this, if we compare Swiss Re to a pure capital provider, a pure capacity provider, the capacity provider brings capacity to where the risk is, Swiss Re brings solutions to the clients, and once a year we get paid by means of reinsurance.

Michel Liès

Thank you very much, Matt and Christian, so before moving to the questions, let me just conclude and to reiterate what's next for Swiss Re? The photo doesn't only states but also links with our Monte Carlo team creating the future, as this is what is happening around Zurich headquarter currently, where we started reconstructing one of our main office building.

To conclude on Slide 30, you heard my two colleagues Matthias and Christian, as alternative capital increases competition and capacity but does not challenge our business model. We indeed are a knowledge company, with permanent contact and a deep understanding of our clients throughout the entire organization, and through our differentiation of products and services we create more value for clients and generate additional profitable business.

I would like to reiterate on to what's next? That we will continue to deliver on our unchanged group strategy based on the clear implementation levers that we have identified. And finally our financial targets are and will remain the top priority for us, they are a constant reminder and incentive for us to deliver.

Let me conclude with Slide 31, where you can see symbolic for the future a preview of what [indiscernible] may look like in 2017 where you are [indiscernible]. With that I would like to move to the question-and-answer session starting in the room. I think there is a gentleman just in front of me who has been desperately waiting for 15 minutes, we should start with him.

Question-and-Answer Session

Operator

(Operator Instructions)

Unidentified Analyst

Thank you. [Indiscernible] and today a [indiscernible] sending out an analysis saying that a larger problem than the alternative capital on the industry could be below interest rate. So when comparing those two challenges how large would you see the low interest rate as a challenge to your company?

Michel Liès

Yes low interest rates, it has been a problem already right, we have experienced a -- low interest rates and our opinion is a very huge challenge on the life side. Because in the low interest environment the number of the products especially those with a substantial savings components are not terribly attractive for potential policyholders, and therefore on the life side in a low interest rate environment that is a bit of a problem. On the P&C side as an underwriter I must say I actually do like the low interest environment because it means you need to make the money on the underwriting side you cannot rely on investments which is a good thing. And in addition to that when interest rates are low typically also inflation is low. And when inflation is low this means, lost trends are low and that's also a good thing on the underwriting side. So we have to differentiate this argument.

Unidentified Analyst

[Indiscernible] Christian if I just go back to Slide 11 which is your pricing drivers, on the theme of interest rates again but from a different angle and maybe Matt your perspective, what level of further yields have risen about 100 basis points across the curve here in the last six months? What level of further yield rise do you think will start to impact technical pricing, obviously casualty pricing has started to feel some pressure is it another 100 basis points, is it the U.S. tenure well above 3%, and can you give a perspective of what point higher yields will need lower pricing?

Second question regulatory change which you have got a sort of flat saying its kind of Solvency II was delayed but these things elsewhere, just clarify what other parts of the world are you seeing pressure for surplus relief or quota share type deals associated with regulatory changes. I know you have done a lot in Asia but you have kind of pull back some of that recently. So where is the regulatory change helping you?

Christian Mumenthaler

Okay so this means that I take the first part interest rate increases look already 1 basis point increase will probably affect a tiny little bit the pricing because insurance companies and reinsurance companies they try to make an assessment taking into account economic reality. And every time interest rates are moving that is taken into account when determining discount rate. So it's not a threshold below which nothing happens and above which paradise starts to occur, it's really a relationship whenever the interest rates move this kind of factors move as well and influence the price.

Matthias Weber

Yes, and I think on the regulatory side, you see nearly everywhere, so Brazil is changing, Mexico is changing, China is changing, Japan is changing, Australia is changing and it's constantly, right there is version one, version two, version three. There is just a huge activism in regulations now. Can I immediately predict huge business opportunities, not necessarily, but usually what happens is and it takes a long time right, in preparation two, three years. Once it's enacted we have, even if the overall capitalizing industry remains the same, which usually is the purpose, you have some place that are looking worse than before and these then typically for one, two, three, four years they need some support to get back to look it again in the new system. So regulatory change I think historically has been a positive for us and I just see, I would say even hyper activity a bit everywhere. EBITDA is just may have something on regulatory changes and we may experience the anecdotal which is probably a [indiscernible] as European with the non-European countries adapting probably earlier than Europe, countries like Mexico and so it's efficient which is -- yes, from a European standpoint moving exactly at the speed that we should move.

Michel Liès

Next question is from [indiscernible].

Unidentified Analyst

On a slightly different note we would agree yesterday were expressing their concern after the use of broker facilities such as the [indiscernible] tranche deal and the potential impact that could have on the reinsurance market and the choice out into clients. Do you have any views on these facilities?

Michel Liès

Yes, so I would [indiscernible] with this we think the market is dynamic and there are always factors which are a little bit positive and there are factors which are negative and taking into account all these factors leads to a demand supply characteristic and that becomes the price. And the broker facilities are probably a factor that influence the demand supply characteristics a bit. Personally I do not believe it is the most important factor that exists but it is probably something that most price levels are little bit and this is happening now. But things like this will happen tomorrow and then a year from now, so that's just how life is what we have to do and will do as the charts say it.

Fabrizio Croce - Kepler Cheuvreux

Thank you very much, Fabrizio Croce from Kepler Cheuvreux I have actually two questions I have that and only to have this confirmed. When this alternative capital comes in the market apparently use every time the cheapest of all possible model. And normally it's EIR. But simply could you confirm this as well and this will then go into the average that if we have a claim sooner or later someone could be burned substantially or do you think that they use a little bit older model and so they make a mixture of it?

And then in terms of business appetite, if I understood properly on casualty you had a little bit more appetite beginning of the year than you're now, now you're a little bit breaking, waiting these reserves to be depleted and then you enter more aggressively. So you break that a little bit potentially and suite it properly. And in terms of emerging markets are you still interact with target you gave last year, so are you really and still looking for having emerging markets contributing to one quarter for business going forward?

Michel Liès

So if my math is correct Fabrizio this sounded like three questions. So let me start from the back, so the answer to your third question or the question to be is yes we are on-track. With respect to casualty what we announced last year, we have been doing it and we will continue to do it which means we are continuing to position our self to be in the market then by the time when the reserve releases are depleted are gone and price levels move on a broader scale based on the fact that it's easier to go from a 2% share to a 10% share on a contract than from a 0% share to a 10% share. That we have been doing already and we will continue to do that and this will lead to some growth. However, the reason why we were not mentioning it is that it's very controlled growth, it's not an earth moving growth.

And with respect to the capital markets question which I believe was your first question. So little bit hard to answer because I am not keeping track of who exactly is using which model in the capital market. However, we know one thing right investors most of the investors are actually pretty skilled. [Indiscernible] you want to make sure that it's a good investment. I do not believe that investors just can be fooled by everybody's using the cheapest model and this reduces the price. Investors also know there are multiple models, they know which model is more expensive where and which model is cheaper. They probably take that into account and if somebody makes an issuance based on the cheapest model they apply a higher multiple to the expected loss. That's what I would expect a responsible investor to do at least if this investor invested in anyone.

Matthias Weber

Just to add, it's definitely before us the long-term conviction and that the ILS market days and days of move in the economic power of this planet. So definitively some of the hiccups on the way does not change, do not change in any way our strategy and the way in which we want to approach the rebalancing of power in fact [indiscernible], you are not blindly upset by gross margin if you saw that for example in the last month you will add some decrease in China so sometimes we also can be critical in the way in which the price can be approached there but I would say the investment appetite, short-term change does not change in any way, our middle to long-term appetite on these markets and for the time being has no effect on the percentage that we did actually.

Unidentified Analyst

[Indiscernible] I have got three questions. One is very simple to answer, do we have a soft market or are we entering one? The second question SMP that last week in a report that they expect the big professional reinsurers to have reduced profit in the next one or two years and you stick to your targets who is right and why are you better informed than SMP?

And on this whole thing of the capital, it seems to me that the brokers are talking it up and you tried to talk it down and this is in effect a major challenge to you and we have earlier the session with [indiscernible] where some of your clients said that -- of your clients I know that they sit with you that the whole pressure on that Cat capacity from the pension firms et cetera had a ripper on effect on all other areas of reinsurance. So again back to my first question do we have a soft market as we enter a soft market? I know that you hate to answer that but it would be good.

Matthias Weber

We like to answer every intelligent question and this definitively qualifies. So I actually believe if we look back we have been neither in a soft market nor in a hard market for quite a while for a number of years. Like in the 80s and in the late -- in the 90s including the late 90s I think we have seen relatively large up and down things that was through also after 9/11 and with respect to Nat Cat 2005 and 2006 in response to the U.S. hurricanes the Katrina, Wilma and [indiscernible]. Today if we looked at the capital that is around in the industry, the capital is very big, it's not economically available capital this capital is boosted by the fact that interest rates are very low which created gains which boosted the capital but if you just look at the balance sheet we actually would have expected a soft market to be in place for a number of years already.

And that's not the case, so it feels a bit wrong to talk about soft markets or hard markets we can talk about softening and some hardening that is technically happening. But right now it's neither a soft market nor a hard market, the results in the industry have been descent and if the industry makes decent results it is not a soft market anymore. I take maybe the third question related to Nat Cat, well you have seen the numbers which I presented and in my opinion the numbers to date are always speak for themselves of course different people can make different interpretation of it, we are not taking this alternative capacity has absolutely no impact at all, right we have seen decreases happening, May, June, July. We are also saying that this is one of the place that price levels in Nat Cat are decreasing but at the same time we are observing that they are actually not decreasing anymore they have stabilized over I think for a while in the capital markets and from this with the expectation that maybe it solid bit more likely that interest rates will go up and not down, we derived that we will experience a stabilization also on the traditional reinsurance side.

There I see we have some questions on the phone, operator could you please.

Question-and-Answer Session

Operator

The first question from the phone comes from Cameron Husain from RBC Capital Markets. Please go ahead.

Cameron Husain - RBC Capital Markets

I have just got two questions, and the first one is natural catastrophe business could you -- one of your peers yesterday gave a percentage of their bulk that they made up, could you give us some of the percentage for yourself?

And the second question is just on the government programs, could you give us some evidence on the shifts of governments moving from the Nat Cat risks into the private sector and kind of the support looking guidance or maybe kind of the regions in which you see the trends happening? Thanks.

Michel Liès

So I don't know about you but I have a little bit problems understanding the question. Was your second question related to -- can you give an example of a government shifts Nat Cat risks into the private sector was that the question?

Cameron Hussain - RBC Capital Markets

Yes that's correct.

Michel Liès

Okay, one example is for instance Mexico, there [indiscernible] which is basically the government reinsurance arm of Mexico actually has issued for a number of years already Cat bonds earthquake bonds and these bonds have increased overtime and that is an example. There is also an example in the United States for instance where the State of Alabama has been buying a line that is exposed to U.S. Hurricane. I was not able to hear the first question, so somebody has heard it here in the room and could repeat it that would be fantastic. It looks like nobody has heard it.

Cameron Hussain - RBC Capital Markets

So let me try it again. I was just incident, how much of your book Nat Cat reinsurance [indiscernible].

Michel Liès

Okay, well, it's part of our regular disclosure and right now if I remember the number correctly and I'm looking at my colleagues from Investor Relations to nod but the total amount of Nat Cat premium for the group is of the order of US3.4 billion, does this sound right Chris?

Christian Mumenthaler

3.2.

Michel Liès

3.2, okay, yes, that's helpful.

Michel Liès

Can I maybe answer your question on the results because that's the thing, at group level, the thing that I said is that, the target that we define for a period 2011, 2015 are invalid, and these targets were not there we changed and I definitely believe sit behind this target group level taking into account specially that our differentiation is definitely on the rising so that is the answer that I can give you.

Operator

The next question from the phone comes from Thomas Seidl from Sanford Bernstein. Please go ahead.

Thomas Seidl - Sanford Bernstein

Two questions; number one on the high growth markets, if you pick China or India you point out the strong growth; however, these markets have also seen quite significant levels for foreign insurers -- reinsurers to enter these markets, if you use the table one to 10, there is one very restricted to 10 to open market, how would you see over the past years the openness of these markets towards foreign reinsurers?

And secondly on the alternative capital, you sounded a bit defensive and I was wondering why you wouldn't embrace this more than an opportunity if you have the top knowledge, others are willing to provide cheaper capital wouldn't there be an opportunity to generate a nice fee business for Swiss Re?

Michel Liès

First, if understood correctly what's the level of openness of markets like India and China?

Thomas Seidl - Sanford Bernstein

Correct.

Michel Liès

So, I think both it is quite instinct philosophically if you look at emerging markets. Some of them have opened up very quickly like Eastern Europe and within two, three years they were completely taken over the by the big players. So I can fully understand that some of these markets like China and India in particular, they're very cautious about that and they staged that over a longer period of time, so the significant hurdles to go in and certainly as a primary insurer you can only go for JVs you can only have a certain percentage of these JVs and there is hurdles on the way and there is clearly a wish by these governments to make sure that this knowledge transfers into these countries.

In term of reinsurance it is much more open, so I think also Swiss Re has been active in these markets for decades and I think we have added a lot of value through all these decades and helped a lot of people, educated regulators, we have helped insurance companies and so we're able to make profits and bring this profits to Zurich. So I think in terms of openness I'm not sure for all reinsurers but us certainly its was there for a long time, we have a good relationship with these governments. I would say it's very open and pretty pleased to hear.

Christian Mumenthaler

With respect to the second question taking advantage of opportunities, we are actually taking advantage of the opportunities provided by the capital market. With respect to our peak Nat Cat risks and we realized we can write more business than our Nat risk appetite allowance which is derived from our economic network and we are writing these additional risks and sitting the additional risks into the capital markets so that's one way for us to take advantage of it quickly. But in addition to that we are also deriving additional business opportunities for us and our clients from it, for instance one product we are offering is called warehousing, where we offer traditional capacity to our clients with the options if price levels in the capital market drop below a certain threshold the client can replace some of the capacity with a Cat bond and in my opinion this product is a very attractive product for our clients, which some of our competitors which are not operating in the ILS space cannot offer [indiscernible]. So we absolutely are taking advantage of opportunities that are provided [indiscernible].

Matthias Weber

I would add that -- we have to keep in mind that even if you do a lot, even if you are number one the fees generated by that will be minimum in view of the figures we have otherwise. So I don't think it can become a major part of our profit line.

Operator

Thank you, we're coming now back to the room with questions. Gentlemen could you please identify yourself?

Unidentified Analyst

Philip Thomas, writing for divisions such as Germany Insurance Magazines. First of all you indicated that generally the market was likely to generate less Cat on the reserving side than Cat is being released, is that comment also related to your own portfolio or is there a balance between Cat being released and Cat currently being created? Is there constituency of preserving standard that applies? Furthermore looking at profitability is part of the enhancement of corporate profitability and ROE due to the ending of the virtual [indiscernible] and what has the cost to your shareholders being overtime and on annualized basis. Looking at the shareholders as well and this the general issue for the Swiss reinsurance plus the corporate tax rate is only 10%, one drawback seems to be the 35% of building tax on dividend, so far people are addressing this by our reductions in the par value for the shares, but this cannot go on forever. Where do you see the solutions, are you lobbying Swiss government to drop the rate of corporate tax, withholding tax on dividend? Thank you.

Michel Liès

So I will take the first question; reserve releases and our research setting is based on each quarter we try to the best of our knowledge. We do not have an analysis in-house which would show we do have so and so much excess reserves. In order to set our reserves we of course have to make assumptions in terms of future inflation. And to the extent that the inflation which actually happens in the future turns out to be lower than what we assumed that leads to reserve, the additional favorable reserve development in the future. And if the opposite was the case that would actually have to reach to reserve addition so the fact that you have seen positive reserve releases from Swiss Re over the course of several quarters, if not several years, in the past the chart shows that we made assumptions, implicit assumptions in terms of future inflation and the reality turned out to be more denying than what we assumed than we were set in reserves.

Matthias Weber

And probably we should have talked about the future and dividends side, and on tax side. I am not sure you are aware of this special law, I mean there was a change in tax law two years ago in Switzerland. Which allows companies to payout the paid in capital so the [indiscernible] tax free for a few citizens and we have a lot of shareholders. So that made it very attractive, there was a counter political movement to that, but at this stage it doesn't look like it's going to be cancelled. So for now I think like we can continue to pay out from that module which is quite substantial for a few years. I don't foresee this to change offer which is not to be taken back nor a lot would change that normal dividends with be extensive impact, politically I don't see that happening. So it's a one-off for a few years, from my judgment to say.

Operator

We take the next question from the floor, Michael?

Unidentified Analyst

The question between what was the cost of virtual relationships to [indiscernible] industry?

Michel Liès

That is probably not a number which we know by heart in order to really give you an intelligent answer we have to regroup and get back to you.

Matthias Weber

Now there is many different transactions you shouldn't forget that if the quarter, three or five years the adverse development cover and it was a live retro transaction, so it's a little thing so I don't know it by heart.

Unidentified Analyst

[indiscernible] and just one question, you have this excellent slide, on slide 16, which shows the pricing of the Cat bond really lovely I have never seen something like this before and so it's also -- my question would be how does the pricing compare if I were a prime insurer to the pricing what I would have to pay if I brought a normal reinsurance contract from any of your competitors, is this ILS market is still a lot cheaper than what you have told, is now that's the same?

Michel Liès

That's a little bit hard to really tell you and the reason is we're talking of two different programs, right, one is collateralized, difficult by definition one is collateralized related to ILS and traditional reinsurance is typically uncollateralized so there is a difference there. Then something which matters as well is insurance linked security sometimes is based on an index, the CS for instance in the U.S. which means that whether it's protected by the Cat bond it still has to deal with the basis risk, what is the price for a basis risk, so it's not really one to one, in addition to that reinsurance typically comes along whether in statements at 100% premium insurance linked security is a one shot coverage. So in order to translate one into the other you have to make a number of assumptions and the answer to your question is probably just a reflection of the [indiscernible] assumptions you made, if I therefore could try to answer your question first on a relative basis and with the absolute level away because of these difficulties. Us spreads adjusted seasonality and so have come down, the difference between ILS and reinsurance has decreased.

Christian Mumenthaler

Conscious of time I think we take one more question.

Unidentified analyst

I just wanted to quickly ask do you think, I wanted generally get your views on systemic risk regulation reinsurance and where do you think that [indiscernible]? And also whether or not you think that that could affect the way in which the reinsurance and insurance industry makes use of the third-party capital engages with it and the kind of product do you think that that will offer to given the [indiscernible] competition? Thank you.

Michel Liès

I think that there's a battle that the industry has a rule not only the insurer, not only reinsurance but globally the insurance company has lost its battle and we do believe that we are definitively not creating risk but we are improving risk. So my first logical answer would probably be that the last logical way we would say that no insurer should be [indiscernible], you know that decision has been postponed now, the decision about the reinsurer and we'll what will happen. I cannot give you any comment about what may happen in the next 12 months, about the reinsurance industry but at least probably the postponement of the lines from [indiscernible] about some of the principle we attract behind the decision of creating this systemic dimension for the [indiscernible].

On the other question it is very, very early to [indiscernible] absolutely impossible to know what is exactly the impact that it will have, based on the capital base, based on the regulation the [indiscernible] I do not think that laws of our world will change, we have excellent relationships with all the regulators with whom we are working and probably to give you a more concrete answer on the [indiscernible] we need kind of capital chart coming -- making our business model less interesting or more interesting. Obviously I'm not too concerned about that, taking into account that the capital charges is not supposed to really massively change, obviously of course but again [indiscernible] what will be the decision, if any decision is taken about reinsurance being [indiscernible].

Unidentified Company Representative

With that thank you all for joining us here in Monte Carlo in the room and also over the phone. We'd like to conclude [indiscernible] bye.

Michel Liès

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. Good bye.

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