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Executives

George Quinn - Group Chief Financial Officer

Eric Schuh - Head of Investor Relations

Analysts

Daniel Bischof - Helvea

Thomas Dorner - Citigroup

Thomas Seidl - Sanford Bernstein

Vinit Malhotra - Goldman Sachs

Jason Kalamboussis - Societe Generale

Andy Broadfield - Barclays

Andrew Ritchie - Autonomous

Maciej Wasilewicz - Morgan Stanley

Kamran Hossain - RBC

Michael Huttner - J.P. Morgan

Stefan Schürmann - Vontobel

Fabrizio Croce - Kepler Cheuvreux

Frank Kopfinger - Commerzbank

Swiss Reinsurance ADR (OTC:SWCEY) Q3 2013 Earnings Conference Call November 7, 2013 7:30 PM ET

Operator

Good morning or good afternoon. Welcome to the Swiss Re Third Quarter 2013 results conference call. Please note that today's conference call is being recorded. At this time, I would like to turn the conference over to Eric Schuh, Head of Investor Relations. Please go ahead.

Eric Schuh

Thank you very much. Good morning and good afternoon everybody, and also from the Swiss Re side, welcome to our third quarter 2013 results conference call. I am here with our Group CFO, George Quinn, who will give a brief introduction to the results before we start the Q&A session.

George Quinn

Thanks, Eric, and good morning and good afternoon to all of you. I'll start briefly with some of the highlights from today's management. We are pleased Swiss Re has delivered excellent results. This story is best illustrated by its combined ratio of 80.9% and premiums grew by 20% and reserve releases more than offset relatively significant man-made events in the quarter.

Our outlook for the January new event changed compared to that that we gave at Monte Carlo and we still expect to see nat cat pricing decrease before it stabilizes in 2014. Other lines of business are expected to remain flat.

Life & Health Reinsurance's result was depressed by further Australian group disability business strengthening $121 million. The overall ROE of 0.9% is far below any reasonable expectation but we do remain confident that our restructuring efforts will deliver the 10% to 12% ROE that we are committed to by 2015.

Our asset rebalancing is largely complete and has already led to slightly higher running yields, 3.3% for the quarter this year compared to 3.1% in the third quarter last year and 3.2% in the second quarter this year. Now going forward, given the level of interest rates, we now again expect to see modest drag on the running yields about 0 to 5 basis points per quarter.

Also as we highlighted at the Investor Day back in June, we're also aiming to adjust leverage by more than $4 billion by 2016, and as you may have seen already today, we made significant progress against that objective.

The Group's solvency cash ratio of 229% is a good reflection of our continued very strong cash position, which brings me to our capital priorities. There is no change for the overall message. First priority is to give regular dividends in line with earnings. Secondly, we aim to grow the business where it meets profitability requirements, and we do continue to see opportunities to invest, but a special dividend is possible depending on the precise year-end capital position and our view of future opportunities. We will make a final decision in February.

With that, I'll hand it back to Eric to host the Q&A session. Eric?

Eric Schuh

Thank you very much, George. Now I'd like to turn to the Q&A, and as usual could people please restrict themselves to two questions each and revert themselves for follow-up questions. A certain discipline is essential today as many of you will have other conference calls to attend, so I will need to ensure this call ends on time, that's 2.30 Swiss Time or 1.30 London, even if we still have questions in the queue. So operator, could we please take the first question.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Daniel Bischof from Helvea. Please go ahead.

Daniel Bischof - Helvea

I had a question on the asbestos reserve increase, and I think you had some additions in U.K. last year and now in the U.S., so could you provide some more details on the reserve increase of $250 million, and also more generally, how comfortable are you in terms of the A&E reserve position?

George Quinn

I mean just to make sure everyone is on the same page, we have added $247 million to our asbestos reserves in the U.S. this quarter. I mean that was mainly driven by our regular reviews that take place, and the main driver this quarter was that we felt we should have a slightly higher survival ratio than the one that we were seeing pre the increase in reserves. So that was really the key driver. Overall, we feel comfortable with our position on A&E in the same way that we do with other parts of the portfolio. I mean as you are well aware though, we look at the adequacy of our reserves as an entire portfolio. From time to time, we expect to see some positives, some negatives, but the critical ratio is that reserving is at least adequate overall, and we feel very comfortable with the firm's current reserving position.

Operator

The next question comes from Thomas Dorner from Citigroup. Please go ahead.

Thomas Dorner - Citigroup

So my first question is on P&C reinsurance on the man-made losses meant that you sort of missed the underlying combined ratio target in Q2 and Q3, I guess can you give more color on them, and I mean it's clear from your commentary that you don't think this is a trimester, sort of a two quarter long [indiscernible], can you say why you are so confident it's not an issue? And then the second question is on Admin Re actually and your plans for sort of addressing lower ROE. I appreciate you can't be too specific but how comfortable are you with the sort of informal timeline you had of dealing with Admin Re by the end of the year, is that still sort of the timeframe we should be thinking about?

George Quinn

Thomas, so first of all on the man-made loss side, I think if we just highlight, I guess we've all seen today that if you reverse the impact of relatively low nat cats and the impact of positive reserve development, we end up with an underlying combined ratio of about 97%, which of course is substantially above the level we had indicated back in February. We don't know we have a particularly elegant way of isolating the man-made loss component. We have never tried to do that. I mean I think a direct – and those of you that have the slide pack, to Slide 21, on there you can see a summary of the patterns of impact in the third quarter. So we have a number of – in fact fire losses, that's a dominant driver, we've got marine loss, and we're seeing – I mean if I look at recent history, I think this is the highest level of man-made losses we have had in some nearly seven or eight quarters.

So that's the key driver, and the last two other items, we've had a minor restructuring take place within P&C reinsurance. That has also contributed. I mean so this combination is what drives the underlying combined ratio up. I mean looking at the drivers, we feel confident that the choice of the guidance that we made at the beginning of the year around the underlying combined ratio is still valid. So we don't see anything that would lead us to either change our conclusion or change the guidance that we gave you earlier in the year.

On Admin Re, I guess you'll appreciate I cannot say anything other than what we said in the press release already about the discussions with Phoenix, and I guess if I now indicate timelines, I guess by definition I am, I mean that process will take as long as it does. I can't really add anything to what we said earlier in the year on the press release. I mean from an Admin Re perspective overall, our strategic goals remain unchanged, our aims to tackle it remain undiminished, and so I mean when we have a new news on this, you'll be the first to know.

Thomas Dorner - Citigroup

Thanks George. Can I ask, the restructuring, the minor restructuring you mentioned in P&C reinsurance, I mean is it genuinely minor and immaterial or is there anything we should be aware of there?

George Quinn

It's about 1 point on the combined ratio and expenses.

Thomas Dorner - Citigroup

Okay, thank you.

Operator

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

Thomas Seidl - Sanford Bernstein

Questions on the investment income side, number one, what exactly are the key actions you have taken to boost running yields out? When we looked at the asset mix overall, I mean minor moves but nothing spectacular. And also have you consumed the $3 billion you wanted to spend on this? And secondly going forward, if I understood you correctly in your introductory notes, that this is a one-time action from here, you see it trending down by 0 to 5 basis points quarter on quarter?

George Quinn

If you see the [indiscernible] we actually did it in the quarter, so that [purchases] (ph) on the asset rebalancing side, we added about almost $4.5 billion to credit. So that was a major change that you saw on the running yield in the quarter. I mean that is largely complete on the process that we announced certainly invested through the rebalancing of the asset side. I mean we have also done on the equity side and we are all been done on the short duration asset position that we announced. So I mean that's really the key driver, and that obviously lifts the running yield.

You've seen in the quarter, given that when they are finished and assuming that interest rates remain at these levels going forward, we'll see a modest drag quarter by quarter to be reinvest at slightly lower rates that we think on average on the current portfolio, and we have given guidance today that that should be between 0 and 5 basis points per quarter.

I mean one point to highlight, the short duration position that we have is reversible at any time, it's not a difficult or illiquid position to address. I mean we are modestly in the money compared to the level at which we stepped out. I think we have an expectation that certainly over time interest rates will go higher to offset what we have for the time being.

And again, I mean as we had highlighted back in June, we have now consumed the $3 billion of capital that we had highlighted at the Investor Day as the capital required to support [and this was taken] (ph), and as you've also seen on the SST ratio, that's the principal driver of the reduction from 245% in the earlier part of the year to 229% SST at the beginning of the second half.

Thomas Seidl - Sanford Bernstein

All right, excellent. Thanks George.

Operator

The next question comes from Vinit Malhotra from Goldman Sachs. Please go ahead.

Vinit Malhotra - Goldman Sachs

Just on the gross written premium growth in non-life reinsurance, 14% in the third quarter, just that number [is not a] (ph) strong number on the gross level and I was just wondering if you could comment a bit on that. Secondly, just wanted to understand the Life & Health ROE targets which has been maintained for the medium-term. The debt swap that has been structured probably adds around I think 1 point of ROE on a very rough calculation and the target is still maintained, so I just wanted to understand how you think about that?

George Quinn

So, on the quota, I'd pass. So it means our expectation was to see declining gross rates, which I guess we have done, I mean from very, very high levels to, it is still high but I mean…

Vinit Malhotra - Goldman Sachs

Not quota, I meant the P&C reinsurance, sorry.

George Quinn

Oh P&C reinsurance, it's a dominant driver of P&C reinsurance as they expire the quota share. If you take out the impact of the quota share, the underlying growth is more like 2%.

Vinit Malhotra - Goldman Sachs

Even with the gross premiums written in 11.

George Quinn

I'm talking [and] (ph) for the time being. So I mean the driver of the gross lend premiums is the impact of the new. So I mean you saw us announce some rate effects but we had some growth in the portfolio, and that's what comes through from the earlier renewals.

On the Life & Health ROE target, I mean just to make it completely crystal-clear, this was not a step towards the target. I mean this is right pocket-left pocket. So I mean we haven't changed the target but I expect Life & Health to do better by this [summer] (ph). This wasn't part of what was contemplated back in June. This is simply an adjustment of the capital structure. So in essence the target is a bit higher because of this.

Vinit Malhotra - Goldman Sachs

Yes, it can be direct. Thank you very much.

Operator

The next question comes from Jason Kalamboussis from Societe Generale. Please go ahead.

Jason Kalamboussis - Societe Generale

Couple of questions. The first one is on the Life Re side. The heat of around $500 million that you are going to take in [indiscernible] booking, is there any chance that we can see that coming a bit forward, so in fourth quarter, and also is there therefore a chance that we see it increase for 2014? And the second thing is on the running yield, if we say that it's going down by around 0 to 5 basis points, is it fair to assume that some of it are making it up from the higher equity investments or not?

George Quinn

So on the first one, Jason, on the Life & Health number, I mean Alison and team are working really hard to get it done as quickly as they can. I mean if we are able to get things done in the fourth quarter, we absolutely will. But does that mean a change to the overall number? No. So I've talked to Alison and Justin several times, they both feel confident that $500 million is a good estimate. You will appreciate though that it's a relatively small number of transactions, there's quite a bit of event risk around each negotiation, but I mean the team is working hard, it seems to be on track, and we have no change to what cost will be.

On the running yields, we actually don't take the running yields, I mean the running yield was purely a fixed income view. I mean you're right, I mean if we look at the potential impact on the overall yields of the equity portfolio, if you make broader market based assumptions, you could anticipate some improvement from that. I think the challenge for us though it is very hard to call when that comes, because part comes through dividend which is typically more predictable, and some will almost certainly come through gains and some will be losses. I mean overall it's hard to predict exactly when that impact will arrive, but equities and sales don't impact the running yields.

Jason Kalamboussis - Societe Generale

No, it was a separate, maybe just you have the more realized gains within equities that you know the overall what you take out of equities is most essentially in the third quarter but it could be due to realized gains.

George Quinn

Yes, I mean from what we see, I mean the bulk of the equity portfolio is managed externally. So the managers make decisions around timing of entry and exit, and we see active management of a number of the mandates this quarter and that's obviously driving up the contribution from realized gains, but that's not something the Group is instructing.

Operator

The next question comes from Andy Broadfield from Barclays. Please go ahead.

Andy Broadfield - Barclays

Two questions please. One, and I apologise if I'm [indiscernible] something here, but the discussion about special dividend, the SST of 229% and that was [indiscernible] some major change in the fourth quarter, I can't – maybe I'm not creative enough but I can't think of a way in which you could utilize the capital to not justify special of some sort. And so I guess the question is, what barriers – assuming there are no major losses in the fourth quarter, which may be less anyways, some more weeks to go, what major thing would stop you that you couldn't grow to use as much of the capital as you'd think, as what other major things might stop you from paying a special? That's the first question. The second question, just as a bit of a [indiscernible] question because there's obviously been a lot of speculation of Spanish surety issue in the market and I was just wandering, and probably I've missed this as well, what your position and exposures might be to that piece?

George Quinn

It would be a surprise to me if you had missed something on either of these two topics. So on the special dividend, I'm going to avoid the hypotheticals, I mean I think we are relatively transparent with the capital position coming ahead. So I think it is pretty much exactly what you would expect it to be given what we had announced on the asset side. I mean what could happen between now and February, I mean if we split losses, we will make a lot of money and we will create even more economic capital.

I mean we see the potential to invest. I don't know if we will but I mean we see the potential for that to happen and the key driver, whether we do that or not, sort of is do we get the right levels of return. I mean you can see today we have signalled that there's a willingness to consider one but we won't make the decision until February, and my guess is you can see all the possible things that I can see, just you can't see amounts or probabilities. I'm going to avoid the what could cause you not to pay a special dividend question at this stage. On Spanish surety, it's not an issue for us.

Andy Broadfield - Barclays

Okay, so we shouldn't expect to see anything from you at all on that?

George Quinn

No, nothing material for us.

Andy Broadfield - Barclays

Okay, thank you so much.

Operator

The next question comes from Andrew Ritchie from Autonomous. Please go ahead.

Andrew Ritchie - Autonomous

A very simple question to start with. It's quite hard to model the net earned premium trajectory of the P&C business and if we take the Berkshire effect. I thought the 19% year-on-year growth back of the envelope was about 15% to 16% of that was Berkshire effect and the rest was earn through of increased business. Can you give us any sense, kind of outlook there for the next couple of quarters of the rate of earn through for the Berkshire effect? I'm guessing that's about [to pay-off] (ph) by Q2 next year, but could still be quite a lot of earn through of new business. I know some of that new business you wrote was multiyear, it's quite hard to work it out, just any kind of flavor the Berkshire versus organic growth effect would be useful. Second question, as a link to that, I mean George, you still talk about, and I'm not driving for any other angle on the special dividend here, I'm more curious on the growth opportunities which you feel you see growth opportunities, and you mentioned again that you still feel nat cat rates will stabilize in 2014. Mostly your peers have got slightly more bearish given we had a very benign loss situation in the second half here with another hurricane season without losses, what gives you still so much confidence in the stabilization of nat cat and have you not at all got slightly more sceptical of the growth opportunity? Thanks.

George Quinn

So on the Berkshire Hathaway topic first, we reported 19.9% in the quarter and approximately 2.2% is the non-quota share impact. I mean that will vary going forward because you can rate shorter contracts, longer contracts, you have multiyear as you pointed out, but I mean we will see some continuing…

Andrew Ritchie - Autonomous

So does this mean that that non-quota share should increase a bit because it is quite a low impact given the increase in renewals and the losses at renewals?

George Quinn

Yes. Remember what we said before, so I mean you can't rely entirely on the renewal headline because we have got a mixture in there of multiyear underwriting [indiscernible]. It will come through different rates but for Q3 2.2% was the, let's call it the organic element of the [indiscernible] growth opportunities.

Andrew Ritchie - Autonomous

So I mean can you give any color on next couple of quarters on trajectory?

George Quinn

I mean if you go back to July, we reported 11 and you can know from the fact that a chunk of that is going to be multiyear. Again I know for a fact in the U.S. in particular, it is the largest driver of growth with multiyear premium as on July 1. I don't really expect to see fundamental changes in what you are seeing at the moment. I mean it can vary a bit up-and-down but I would be surprised if you saw massive changes, but quota share will continue to be the biggest driver of growth, which I guess leads on to the second question.

So about the nat cat [indiscernible], I mean just to restate what I tried to say earlier, and because I'm Scottish, maybe it doesn't come across so clearly, but we expect nat cat pricing to decrease, and then we expect it to stabilize. For me, that sounds like almost a [indiscernible] of the old days. And I don't feel we have a more bullish view of the nat cat opportunity in the short term, and for the avoidance of any doubt, I really don't expect we are going to come up in January 1 and report massive growth rates on nat cat. So I mean that's not what's in my mind at least when I talk about growth opportunities. I mean I expect to see some growth continue in Life & Health, I think what the team have been doing down on the health side in particular has been good and if we continue that, that will contribute towards the targets.

On the P&C side, I mean I don't see that we can do something that's vastly different from the market. I think we can outperform in some areas but I mean if the market, quickly again in nat cat is going to suffer in the short-term, I mean we can't resist gravity. So we will try and do our best on an average but we won't completely defeat the direction of the market.

On the others, I think we generally expect other lines of business to be broadly flat and maybe some growth opportunity there, but again I think as you appreciate it, I mean to the extent that there is going to be some casualty, it is largely a diversified risk for us. So there wouldn't be a significant cat consumer. I mean what's really in my mind when I think of growth opportunities, we certainly talk on acquisitions for Corporate Solutions. I mean we would like, I think we expect the team to do some of that growth over the next couple of years in the form of an acquisition.

I mean you have seen on the other side, we talked several times over the course of last couple of quarters around our investment philosophy and particularly in higher growth markets and supporting client insurance companies in ways other than traditional reinsurance which would typically mean investments in the capital structure. And it is also something that we would consider, in fact you have seen us do in fact and announce growth really recently. So I think these are the things that are, from my mind, I think have the opportunities that may be ahead of us.

Andrew Ritchie - Autonomous

Okay, great. Thank you.

Operator

The next question comes from Maciej Wasilewicz from Morgan Stanley. Please go ahead.

Maciej Wasilewicz - Morgan Stanley

A couple of questions if I can. The first question, just on Life Re, the disability charge that you guys talked. George, I think – I don't know if I should say self-deprecating, but you used I think the word 'not a good enough job' or something like that when describing how the original estimate was compiled and presented at 2Q, I don't know if I am being too harsh there or if I'm misreading there, I'm just wondering if you can just, I don't know how much far you can go in terms of explaining what went wrong and how are you guys now planning to reverse this situation, I guess maybe you are doing a very, very thorough review that might take a few months and come through next year or something, just what you can tell us there? The second question I wanted to ask is, just on the asset portfolio, you said that the re-risking is done and you have gone through that in some detail. I guess you do still deliberately have an ALM mismatch for good reasons, but I'm just wondering if you were to close that mismatch, so once the yields are moved where you expect them to, is that going to consume more capital than I guess it might create because I guess the ALM mismatch itself might cost you something in capital but re-risking or extending duration or investing cash might cost you something in capital, so just wondering what the balance is of that impact when you close out that position?

George Quinn

Okay. On the first one, I think for the Life & Health team, it would have been a bit hard on them. I think the challenge here is that – I mean we saw the issue in Q2 and I think we really feel we should have done a better job and given better number together for Q2. I mean a lot of the change it seemed comes from new information from clients in the quarter, the third quarter, and you can see around it, that appears to be a broad industry issue, and I think we expect more from our team. So there's a number of lessons to learn from this.

We've had a number of reviews that have taken place. I mean they are largely complete. I mean at this stage, I don't expect further changes from those, but I can see that not in all cases that we have all the information from clients that we'd expect to see. So the team has made an assessment of the risk there and we have made explicit allowances, but I mean just given the experience we've had Q2 versus Q3 and the change that we've had to take, I cannot in the short term exclude the possibility that a further change could come on these reserves. I mean I don't expect a huge drama here. I mean it could well be visible in this segment given the level of earnings, but it can't be predicted. It would not be material for the Group, and that's really the context of the remarks that you saw from me on the video.

On the ALM mismatch side, I mean it depends on what we do with the cash when we reserved it. If we go straight into currency and duration marked government, there is no impact on additional capital, there is no additional capital requirement and we save some $1.1 billion of capital that was required to create the mismatch in the first place. Obviously if we decide to go further into some of the risk classes, then that can have a different impact, but I mean at this stage our intention would be that if and when we reverse this, it will go back into currency and duration matched government securities.

Maciej Wasilewicz - Morgan Stanley

So just so I understand that, maybe I fundamentally just don't understand that one thing, so currency matched government bond investments don't carry any capital charge in your model, is that the implication from that or if I misheard?

George Quinn

It partly depends which government, but in general assuming we're invested in the higher-quality governments, and we are talking U.S. treasuries, bonds, et cetera, these consume no capital.

Maciej Wasilewicz - Morgan Stanley

Thank you.

Operator

The next question comes from Kamran Hossain from RBC. Please go ahead.

Kamran Hossain - RBC

Just got a couple of questions. First one, just the SST ratio, does the 229% increase any impact from the convertible securities you issued, and how [does it bottom] (ph) and just what's the Swiss regulator's view on that? And the second I guess is just touching on what Andrew was talking about earlier that, just from a [indiscernible], I mean thinking about the Investor Day, you had a feeling you could reinvest $3 billion [indiscernible] to hit your 2015 EPS target, do you think you are more positive on that or less positive on the $3 billion capital deployed [at 11% now] (ph)?

George Quinn

On the first question, just to make sure everyone knows, the SST ratio that we published does not include the contingent write-down on note that we issued in March which was $750 million, nor does it include the CHF 175 million bond that we issued in October. The reason for that is they are relatively novel in the insurance sector. We have been in discussions with FINMA with the treatment. I mean at this stage we expect for this to appear in the SST ratio, probably in the course of next year when FINMA has reached a conclusion, but that's a decision that's entirely in FINMA's hands.

But I'd say that we are relatively confident that we will get the credit that we expected when we issued these bonds, but again they are novel and they are quite different from what we've seen in this sector before and FINMA quite reasonably is taking some time to satisfy themselves, which seems appropriate.

On the $3 billion, I would say that today I'm neither more positive nor more negative. I guess we had 2.5 years left back in June, now we are down to 2.25, and I expect the Company will see opportunities to deploy capital. Whether it's $3 billion, a bit less, a bit more, today I just couldn't say, but my level of optimism hasn't changed.

Kamran Hossain - RBC

So I'm asking you on January then?

George Quinn

Sorry, say that again, Kamran.

Kamran Hossain - RBC

So once I come back to you in January maybe.

George Quinn

Yes, and maybe I'll save it for January, but today I couldn't say a thing.

Kamran Hossain - RBC

Perfect, thanks very much.

Operator

The next question comes from Michael Huttner from J.P. Morgan. Please go ahead.

Michael Huttner - J.P. Morgan

Stunning numbers, really stunning numbers [indiscernible]. On the reserve release, can you give a feel of how much is coming from lower inflation, lower CPI inflation and I'm not so sure if we continue to get what Europe is like negative with CPI inflation at the moment in USA alone, I think U.K. is the only country where it is kind of highest, how much should we be kind of half-expecting the quarter? And then on the man-made point, I may have completely misunderstood but at one of the meetings the thing I had was that, in order to grow you would considerably bearing down the risk, in other words more frequency, and then inevitably is my guess you would pick up more man-made, and I just wonder if that's what we are already seeing or whether is that something yet to come? Thank you.

George Quinn

Thank you, Michael. So on the first point, maybe just to highlight what the underlying reserve movements were in the quarter, so we have $351 million of post that May impact from [telecom] (ph) result. A vast bulk of that comes from property, so $371 million from property, which is a combination mainly of tight floods and Sandy and releases. For the other casualty, it is actually negative for the quarter driven by the $247 million adjustment for A&E and we got that $160 million part that's going to casualty.

I mean if I look at it, if you peel back the impact of A&E, we clearly have a positive on casualty generally, and we do have a view on the impact of lower inflation on future reserve release, I mean you are probably sick of hearing this from me, but in general we don't forecast that future reserve release. I mean if everything remains the same, and the reserves that we have simply get pulled from the Bornheutter-Ferguson estimate which is the pricing basis towards a changed line which is currently experienced, you will see a continuation, but I don't have a number in my head, Michael, for what that may be.

But in general we don't plan for reserve release and I mean we don't think it is necessarily a negative but we don't see it as a high quality component of earnings either and we want to avoid a situation where we start to convince ourselves that this is necessarily a part of future and could be relied upon as a recurring part of earnings. I just don't believe that in the long-term it can be.

On the man-made point, I think what you say is right, we didn't change the feedback as of today with the man-made losses. We're only looking at the large man-made losses. So we are ignoring the traditional stuff. So we are picking up the stuff that meets our shares in excess of $20 million. So I mean it really is still severity that's driving this rather than frequency.

Michael Huttner - J.P. Morgan

And is there anything here where internally you might have asked questions to your colleagues saying, is your underwriting discipline shifting a little bit?

George Quinn

You know Matt Weber, I am completely confident in the way that Matt runs the underwriting functions. I mean I think he has long demonstrated his ability to run it extremely successfully. I mean if you imagine that we ask a lot of the questions when we see things that deviate from expected, and Matt is the first person to ask this question. So we have looked at it very carefully and we have drawn the conclusions that you've heard from us today. We really see it driven by mainly the man-made losses and these are man-made losses in excess of $20 million, and they are listed on Slide 21. I mean we expect to see some natural volatility and we have it this quarter.

Michael Huttner - J.P. Morgan

Okay. Thank you so much.

Operator

The next question comes from Stefan Schürmann from Vontobel. Please go ahead.

Stefan Schürmann - Vontobel

I'm going to ask two questions, first one coming back to the Australian disability business, can you just remind us on the size of these bookings in terms of premium reserves? And then the second question I mean coming back to comparing your basically reserve movements versus what Berkshire announced a few days back on the Swiss Re and quota share book, it just doesn't really match from the outside. Can you maybe give some color? I mean Berkshire was giving sort of a negative overall [indiscernible] for the Swiss Re book, you now have some quite nice positive developments, I mean what's the explanation from the outside?

George Quinn

So I'll start with the one I know the answer to and then I will try to get the next one actually. On the Australian DIP, annual premium from the group schemes [is nearly about] (ph) $800 million for us and it breaks down $600 million for disability, $200 million for life. We have a bit more, about $1.2 billion, in reserves in Australia. On the Berkshire Hathaway one, I mean I don't know their numbers, so it's very hard for me to comment. I guess the one thing that they couldn't have known when they published was the results we had for this quarter.

Stefan Schürmann - Vontobel

No, but they basically – most of your reserves basically should relate to all the business you've grown between 2008 and 2012, so I mean a lot of positive movement, so I mean is there any maybe timing there or any specific issues why they diverted a lot from your reporting?

George Quinn

I don't see any reason and I can assure you that you don't get different numbers from the ones that they get.

Stefan Schürmann - Vontobel

Okay, thanks.

Operator

The next question comes from Fabrizio Croce from Kepler Cheuvreux. Please go ahead sir.

Fabrizio Croce - Kepler Cheuvreux

I have actually only one question, it's about Corporate Solutions. It is that you're growing there pretty aggressively, 34% is a big growth. Of course in the process of building up this business, so you need to be aggressive, but on the other hand we see the combined ratio which is actually going out of control, and I mean [105%] (ph) is pretty high level, and the question is actually, what is the limit of growth? I mean as we have in mind that figure in terms of size, that we should start-stop and then start improving the portfolio back to a combined ratio in line with the Group one or what is actually the advanced game of this department, because of course in the beginning you have to be aggressive but the question is when it stops because this quarter actually the operation keeping up all the others at P&C but it is a lot of good luck and it is not really Christmas, so actually going forward, could become an issue?

George Quinn

Maybe if I just give a bit of insight into our Q3 works for Corporate Solutions is quite different to what we used to for reinsurance. As is typical for the commercial insurance sector, we don't earn premiums in the commercial business into portions of risk. So that means again a contract to P&C Re, we actually expect to see an elevated combined ratio in Q3. I mean we've got pro rata to interest premiums and we have a much higher expected loss burden. And in fact I mean if you've seen this quarter, even though it doesn't show in reinsurance, Corporate Solutions has been hit by the two hurricanes in Mexico.

And let me just come back to the broad thrust of the question. I have a completely different perspective on this business from you. I mean I think it is firmly in control. I mean we talk about premiums and we talk about ROE, but the discipline that we apply in the growth and the Corporate Solutions to execute on in order to grow the profit, so there is no volume target in here and there will be no celebration if it gets to – sorry, if Corporate Solutions gets to 4 to 5 and the ROE is not in that range that we promised. I guess the team don't see any differently. I mean they are very, very disciplined group of people.

I mean I think the relatively rapid growth rate you've seen is then expanding footprint into markets where we are not as present as we have been in the past. I mean Swiss Re is a strong brand name. We attract a group of clients that previously were not available to us, but we're not looking to compete on price, we are not trying to be aggressively growing at the expense of margins. The discipline we apply here is exactly the same as the one we apply in P&C Re and in the not-too-distant future, we expect exactly the same performance.

Fabrizio Croce - Kepler Cheuvreux

Okay, thank you.

Operator

The next question comes from Frank Kopfinger from Commerzbank. Please go ahead.

Frank Kopfinger - Commerzbank

I have two questions also. My first question is on the Admin Re business that you addressed, this positive excess, could you comment whether this is sort of one-off or whether this ought to reverse at some point in time? And my second question is on your equity portfolio which has been up now and you also brought up annualized gains, but you also have a certain part of it, and the question is, just on sort of guidance, how much you're going to harvest on the annualized gains there or what is just according to events in Q3?

George Quinn

On the first one, Frank, this is absolutely a one-off but it's a political decision. So the U.K. has reduced tax rate and Admin Re has a net deferred tax liability, so therefore has a positive impact. The only way we'd reverse is if the U.K. reversed direction on tax rates and the firm was still in a net deferred tax liability. So I think we can assume that for the foreseeable future, it's a one-off positive. I don't expect to see a repeat.

On the equity side, I mean in general our equity mandates are total return and we don't give targets to managers for levels of gain realization. I mean they decide themselves when they are to repay in a relatively particular sector, when they put a particular stop, maybe sell one, and so I mean what you've really seen is chance, it's not a directed outcome from the Group.

Frank Kopfinger - Commerzbank

Okay, thank you.

Operator

The next question comes from Vinit Malhotra from Goldman Sachs. Please go ahead.

Vinit Malhotra - Goldman Sachs

Thanks for taking my follow-up. This is again on the 229% Swiss Solvency Test, if I was just looking at the required capital between the last Investor Day and now, it's gone up around $700 million to $800 million, and again going back to the growth in the business and when we adjust for the asset management or the rebalancing capital charge of around $1.6 billion, I was just wondering why this hasn't grown much more, or in other words, the 229% that you have given today as I would have thought already included in the [indiscernible], in other words it could be much higher and I think the driver is the required capital there as well. So if you could comment on the growth in required capital please?

George Quinn

[indiscernible] is that both in fact are required but you would expect them to show up in the available, at least the March one, I guess for the reasons I gave to the question earlier. I mean if there will be a delay before you see those appear. On the risk side, I mean one thing to bear in mind that the $3 billion of that capital was never target capital, that was the required capital multiplied up for the target level of capitalization, so 1.85. You wouldn't have expected to see the target level of capital grow by the flow $3 billion as we talked about back in June.

Vinit Malhotra - Goldman Sachs

But even considering that, this 19.8 becoming 20.7 means there were some other drivers that were able to use this, I think is there anything we should know is what I'm just trying to understand?

George Quinn

I mean it is routine for us to have relatively minor changes in models either that we originate or the FINMA ask for, I mean so there's a number of maintenance topics that are always running in the background. So you will always see some variation from the expected.

Vinit Malhotra - Goldman Sachs

Alright, thank you.

Operator

The next question comes from Jason Kalamboussis from Societe Generale. Please go ahead.

Jason Kalamboussis - Societe Generale

Just a quick one follow-up actually on the same topic of SST. If you have your 19.9 and you add your 1.6, you should be at 21.5, so the difference is relatively big with the 20.7, so you would say that this is on the other adjustments and there is not one big item in there? The second thing is, when I look at RBC, within it you have included the economic loss from Life Re presumably but would it be in general more possible to have a breakdown so that we can have at least some of the items and that we can do sort of a roll forward?

George Quinn

The first question is yes, and you asked the same question. Let me think about it and see what we can do in the future.

Jason Kalamboussis - Societe Generale

Okay, great. And if I may ask just another quick one, on the man-made, I mean if I were to look at your peers, on the man-made even though it was higher you do look to be on the lower end among your peers, and on the other side with a bit of a reversal coming from both the German flood, from the German hail, you had relatively big number compared to all of them. Should we be, what would be your comment on this situation?

George Quinn

It's hard for me to exactly analyze our portfolio versus other companies. I don't know that why it can't do relatively easily as compared to trend and man-made losses, but we have reported, and this is one of the highest quarters that I have seen in the last two years.

Jason Kalamboussis - Societe Generale

Okay, there is no change in what you are underwriting that could reflect either any of these two observations? For example in Germany, you just on both events, you had a very large number compared to all your peers. If I was to look at all the previous events, be it Japan or anything else, you were probably certainly north, way above everyone else. If anything, you were probably coming second.

George Quinn

I mean again, Jason, I think on a relatively let's call it regional events, I would expect to see big deviation between the various companies, but again, it is very hard for me to comment compared to others given we don't know their portfolio.

Jason Kalamboussis - Societe Generale

Okay. That's fair enough.

George Quinn

I mean just one quick comment to make, I mean no change in our underwriting procedures. The thing I just cannot promise you is that every single quarter will have the expected amount of man-made losses. It will vary and we don't try and normalize the underlying combined ratio for that. So, you are going to see some volatility for sure.

Jason Kalamboussis - Societe Generale

Okay, thank you.

Operator

The next question comes from Michael Huttner from J.P. Morgan. Please go ahead.

Michael Huttner - J.P. Morgan

Two questions. One, what's the target ROE and combined ratio for Corporate Solutions please? And the new capital, third-party capital coming in, and I know you spoke about this to one caller, but is your strategy the same as your peers which is you have some [indiscernible] provides different fees at which, in other words active fund manager for this money, and then of course help clients issue cat bonds?

George Quinn

On the first one, Michael, we said that by 2015 we target our return on equity of between 10% and 15% for Corporate Solutions, and for this year, we had indicated that we'd expect to see a combined ratio in the range of 97%, which is not very far away from the May month number that Corporate Solutions has published.

On the second one, I think you're not far. I would change the order though. So I mean the clients have a desire to do this. I mean they are number one priority, and we get some fees, it's not really a number one aim here. I mean it doesn't really make a difference to us financially if we have a fee of passing through large risks. I mean we really see it, one, on helping our clients, and number two, on readying us at risks that are maybe in excess of our risk appetite or otherwise would change the shape of our portfolio in a way that is more capital efficient, but it's not really about the fees.

Michael Huttner - J.P. Morgan

Okay, got it. Thank you so much.

Operator

The next question comes from Maciej Wasilewicz from Morgan Stanley. Please go ahead.

Maciej Wasilewicz - Morgan Stanley

Thanks for taking a second question from me. On the FWD Group acquisition, I just wanted to know, I understand that's part of a broader strategy to buy insurance assets globally where you have some advantage in understanding the business dynamics so you can make a bit of an additional return from your existing knowledge, can I just try to understand the scale of that project and also where does it fit within the asset allocation, is that part of the 10% in equities and alternatives, in which case is it exhausted or is there more to come on that project around that asset class?

George Quinn

I guess the first point I'd make is that, I don't see this as some equity investment project. I guess the way that I prefer to characterize this is, it's an alternative form of capital support for our clients. I mean in some markets, it is clear that reinsurance is let's say less popular given the local market structures. I mean at some point in the future, reinsurance will become an important product but the focus in some areas is more on the primary side for time being.

We believe we could still add value and we believe we could still add capital support, and in this case we have done actually, equity investments that we have made, I mean it is not within the mid-term plan that you see, so we see it as a separate allocation of capital. Again, it is driven by opportunity, and again in particular, the level of returns that we perceive we can achieve there for these investments.

So I mean it is not limited by the 10% that you see on the midterm plan for equities, but I mean for me from a strategic perspective, it's a reinsurance replacement, and we are happy to do that, but we think we know the business, hopefully we can add something, and most importantly, the returns have meet targets.

Maciej Wasilewicz - Morgan Stanley

So am I right to say that it sizes the eventual sort of this type of cover you might give to your clients, it will just depend on what opportunities cross the door or is there any kind of end games or specific amount of capital that you would allocate to that part of the business?

George Quinn

Given it is such a small part and what it does today, I mean we are long, long way away from any particular limitation. And we haven't said that today but I mean when we look at capital allocation for the Group in general, whether it's nat cat, casualty, life, health, Corporate Solutions, Admin Re, or that form of investment, we apply that same discipline to every single piece, and if you want the money, you have to have the target, and that's the basic requirement.

Maciej Wasilewicz - Morgan Stanley

Thank you.

Operator

There are no more questions at this time.

Eric Schuh

Alright, great. So we are done on time. I hope everyone felt that you could ask all the questions you wanted. Please contact me or anyone else in the Investor Relations team if you have further questions regarding today's results or our upcoming events. Thanks again everybody for your participation and goodbye.

Operator

Thank you for your participation, ladies and gentlemen. You may now disconnect.

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