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Executives

James Quin

Martin Senn - Chief Executive Officer

Vibhu R. Sharma - Interim Chief Financial Officer and Group Controller

Kristof Terryn - Member of Group Management Board and Chief Executive Officer of Global Life Division

Michael Kerner - Chief Executive Officer of General Insurance

Jeffrey John Dailey - Chief Executive Officer of Farmers Group, Inc. and President of Farmers Group, Inc.

Analysts

Paul De'Ath - RBC Capital Markets, LLC, Research Division

Michael Igor Huttner - JP Morgan Chase & Co, Research Division

Farooq Hanif - Citigroup Inc, Research Division

Vinit Malhotra - Goldman Sachs Group Inc., Research Division

Andrew Ritchie - Autonomous Research LLP

Marcus Rivaldi - Morgan Stanley, Research Division

Stefan Schürmann - Bank Vontobel AG, Research Division

Ralph Hebgen - Keefe, Bruyette & Woods Limited, Research Division

Atanasio Pantarrotas - Kepler Cheuvreux, Research Division

Jason Kalamboussis - Societe Generale Cross Asset Research

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

Daniel Bischof - Helvea SA, Research Division

Andrew Broadfield - Barclays Capital, Research Division

Niccolo Dalla Palma - Exane BNP Paribas, Research Division

Zurich Insurance Group AG (OTC:ZFSVY) 2013 Earnings Call February 13, 2014 7:00 AM ET

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to the Zurich Insurance Group Annual Results Report Conference Call. I'm Selena, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. James Quin, Head of Investor Relations and Rating Agency. Please, go ahead, sir.

James Quin

Good morning. Welcome to Zurich Insurance Group's results presentation for the first 9 months of 2013. I'm joined by our CEO, Martin Senn; our Interim CFO, Vibhu Sharma; as well as Kristof Terryn, CEO of Global Life; Mike Turner; CEO of General Insurance; and Jeff Dailey, CEO of Farmers.

As in previous courses, we'll make a few opening comments, and then we'll open for the Q&A. As usual, please, keep to 2 questions. And I'll now hand over to Martin.

Martin Senn

Thank you very much, James, and hello, everyone. It's a great pleasure of talking to you today.

Zurich's business operating profit for the 2013 financial year was USD 4.7 billion, up 15% from the prior year. Net income attributable to shareholders was up 4% at $4 billion. We delivered a solid operating profit in all our core businesses, a good growth in priority General Insurance and Global Life markets. Farmers continues to focus on implementing its new strategic direction while at the same time delivering resilient margins. Our results and strong cash generation have given our board the confidence to propose an attractive dividend of CHF 17 per share, reflecting continued strength and stability of our business.

As we said at our Investor Day back in December, much of our business continues to perform very well, but there are areas where we need to improve. And I say that for our 2014 priorities in the results presentation for each of the 3 cornerstones of our strategy, namely: Investing in priority markets; managing all the businesses for value, and growing our operating earnings. These are the cornerstones we have set up.

Now these priorities, they'll drive the actions we take over the course of this year, and we will report back to you in August on our progress as we have also said to do that every half year report.

In addition, I'm very pleased that our group executive committee will soon be strengthened by the addition of George Quinn as Chief Financial Officer, and Robert Dickie as Chief Operations and Technology Officer, and we will have a full-strength management team in place to deliver on our strategy. I will now hand over to Vibhu, who will take -- or will make a few points on our results before we move to Q&A.

Thank you very much. The floor is yours, Vibhu.

Vibhu R. Sharma

Thank you, Martin. I will make a few short introductory remarks on our results.

First, in General Insurance, we grew our gross written premiums in our priority markets by 5% in local currency adjusted to exclude one large fronting contract.

We reported a combined ratio of 95.5% for the full year and 96% for the fourth quarter. There are a few moving parts in Q4, which wouldn't -- I wouldn't extrapolate. Most parts of the portfolio produced very good results, but we have a few pockets where we think we can improve.

The year-on-year impact of low yields on our GI investment portfolio was much smaller in Q4 compared to previous quarters in 2013, and we're starting to expect a flattening out of investment income in the next few years. This is a clear positive compared to where we were a year ago.

Turning to our Life business. Our new business progress is good with new business value in priority markets up 15% in local currency against 2012. In terms of business operating profit, growth in expense and risk margins and in Zurich Santander was offset by lower investment margins and higher other costs. Our key for Life operating profit includes $30 million of accounting charges related to our decision to exit the Hong Kong tied agent business.

In terms of Farmers, we see very positive signs of improving profitability at the Farmers Exchanges and at Farmers Re, particularly in Q4. However, top line trends remain challenging with a decline in the Farmers Exchanges gross written premiums of 3.7% in Q4, mainly due to continued rate increases in our auto business.

While 2014 is likely to be a transitional year, new business and retention seemed [ph] to have stabilized in the fourth quarter. We also don't expect to take the same rate actions in 2014 as we have taken over the last 18 months.

In our other operating business, the Q4 loss of around $350 million is clearly a much higher number than in previous quarters in 2013. This is due to the timing of the media spend and other costs that I mentioned at the time of our Q3 results, and overall headquarter costs for the full year were in line with 2011 and 2012. We would see the current run rate for the total OOB expenses, including financing costs at around $1 billion a year.

Lastly, on restructuring costs. We have taken a total of slightly over $300 million of accounting and restructuring charges in Q4 and expect to take an additional $300 million in the first half of 2014. This is consistent with what we said we would do at the Investor Day on December 5.

In terms of where these costs fit in our Q4 results, $30 million is in our Life BOP; $288 million is outside of BOP, with the biggest item being an impairment of the goodwill relating to our Russian Retail business.

Of the balance of the $300 million we expect to incur in the first half of 2014, we expect around 1/3 to be within BOP, but this is still a moving target so we can't be more precise at this time.

In summary, while not without headwinds, we reported solid operating profits in all of our business in 2013. We see growth in our priority markets in GI and Global Life, strong cash remittances and a very solid capital position underpinned the proposed dividend of CHF 17 per share. And as Martin has made very clear, our priority is now on generating momentum in the execution of our strategy.

We now look forward to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Mr. Paul De'Ath from Royal Bank of Canada.

Paul De'Ath - RBC Capital Markets, LLC, Research Division

A couple of questions, please. Firstly on the combined General Insurance and Global Life corporate line you're looking to promote an -- as an area for your investment. Can you give a little bit more color on this kind of joint minor [ph] business and how you're currently doing in cross-selling the Life Services, the GI customers and vice versa? And what you're doing to this business to make the go-to-market approach a bit better in this business line, see how big the opportunity can be? That'd be great. And then the second question is on Zurich Santander, which particularly is doing very well. And if you could just remind us, please, on how long we should continue to expect volatility from things like the earn-out payments and the PPA adjustments. Essentially, how long before this reaches a business-as-usual state?

Martin Senn

Thank you, Paul. This is Martin. I will pass the question to Kristof, the CFO of our Life business. Kristof?

Kristof Terryn

Yes, so on the first question, we combined go-to-market approach with maybe a few examples. I mean, both from the proposition side, we look at things as integrated absence management, where, really, between workers' compensation and what we didn't do on the Life side. I think we have a true integrated proposition, so that's just one example. I think in general, in terms of the go-to-market approach, the relationships that we have with Global Corporate clients, I mean, gives us an entry going into the organization. We see that risk managers are starting to look much more holistically at the risk profile of the organization across our Life and the GI side. So I think that gives us a very good entry point. I think the other area of synergy is when you look at the international program business. Some of the similar issues that we face on the corporate side in terms of licenses, regulation, international programs. There's some clear synergies there on the Life side as well. So those are just 3 areas where I think we will benefit in terms of the go-to-market approach. Mike, you want to add something?

Michael Kerner

Yes, so thanks, Kristof. So just to add to that a little bit from the Global Corporate GI perspective, we've been pursuing a strategy of product density for quite a long while in this space. We recognized, frankly, years ago that our ability to have strong renewal retentions on business goes up as product density goes up. And also our ability to write new business with customers goes up as the product density goes up. So the more products we can sell to a customer, the more relevant we are to them, the more we're embedded in helping them understand and protect themselves from risk. And, obviously, the Life and pension risks, the health risks that Kristof and his team are working on are simply additional risks that companies face. And we're working together to help those companies that our customers deal with those risks.

Martin Senn

And then on the Santander question. We clearly expect the volatility to go down. I mean, particularly, on the PPA adjustments, I mean, that -- those effects should largely have disappeared out of the results going forward where you will see some small impact still from the earn-out adjustments going forward.

Operator

The next question comes from Mr. Michael Huttner from JPMorgan.

Michael Igor Huttner - JP Morgan Chase & Co, Research Division

Just the -- first one is on your -- you've got this lively triangle, and this is a little bit from memory, but the loss pick [ph] you have for 2013 seems a lot lower than prior years. I think it was 69% until you see a 72% or something. I just wondered why there's been this change. And the second question is on reinsurance. So I think you bought more reinsurance for the same amount of money. Could you -- can you quantify the benefits or can you give a precise -- because I tried to compare, also with the help of your colleagues, the reinsurance program before now, and I get very confused. It's probably my brain is too small, but any help will be very greatly received.

Martin Senn

Thank you, Michael. Vibhu will take the first question. I think that's on Page 38 in the presentation pack. And then Mike is elaborating on reinsurance, which is Page 39.

Vibhu R. Sharma

Let me do -- let me do the 38. First of all, let me make a couple of points. First of all, our reserving philosophy, our reserving process remains unchanged. So that's, I think, a key point just to highlight. When you look at 2013 compared to 2012, I think you should think about 2 things: One, we did have lower cat losses in '13 than we did in '12. In addition, this also reflects the improvement that we've seen in our underlying loss ratio that we've been highlighting, especially when you go back to 2010.

Michael Kerner

So then on -- this is Mike. So on the reinsurance piece of the equation, so I think, fairly well-known and well-publicized that alternative vehicles are getting into the reinsurance space in terms of hedge funds and pension funds and other types of vehicles. This has created the opportunity, particularly in cat reinsurance for us to generate some savings in our purchasing. What we did with that savings essentially was buy more reinsurance coverage. And the biggest change that we made at January 1 was in our Aggregate Cat Treaty, and this is on Page 39 of the pack. But the first layer of the program, we bought down the co-participation from 25% to 10%. So rather than placing only 75% of the cover, we placed 90% of the cover. And we also reduced the attachment point by $100 million. So the cover attaches quicker, and it covers us better than it did in 2013. That's what we did with at least a portion of the savings.

Operator

The next question comes from Mr. Farooq Hanif from Citigroup.

Farooq Hanif - Citigroup Inc, Research Division

Of the $300-or-so million you took in restructuring charge, I'm guessing the majority of that was noncash, so if you could quantify that. And then, also, for the remaining $300 million, how much of that is going to be goodwill accounting related and how much is real sort of hit to capital? And therefore, the question is, are you going to release more capital and more free cash from Day 1 of this than you're going to actually use in restructuring? That's actually one question. That's question #1. And question #2 is -- sorry, about that. So question #2 is, do you think there is a market now opening up outside of the U.K. for -- and outside of the U.S. for closed Life assets, so in Continental Europe? So when you release capital from your Life business and you think about it strategically, is it going to be more about running off or more about selling?

Martin Senn

Thank you, Farooq. Vibhu will take the first question, and Kristof the second.

Vibhu R. Sharma

So Farooq, on your question relating to restructuring costs, virtually all of it. I think there's just a very small portion that is cash, but otherwise, virtually all of it is noncash. So that's sort of Point 1. As we obviously think through into 2014, we're in, as part of executing our strategy, looking at various parts of our business. And as we have better definition of what the actions that we are going to take in executing those actions, the impact will flow through. I wish I could be anymore specific, but I can't on the 2014 side other than what I said. But at least, as it relates to 2013, most of it was noncash.

Kristof Terryn

Yes, just on the second question. I mean, there clearly is a market developing in Continental Europe. That being said, I mean, structurally, it is much more difficult in Continental Europe just because of the regulatory environment to look at partial sales or sales of back books. I think that market will develop. For me, from where I sit, it's difficult to see the rationale unless you are capital constrained to see a large transaction of the back book, and we're clearly not in that position. So for me, freeing up the capital will have to come through the natural runoff of the book, rather than wholesale transactions.

Operator

Next question comes from Mr. Vinit Malhotra from Goldman Sachs.

Vinit Malhotra - Goldman Sachs Group Inc., Research Division

Just I wanted to throw a bit of focus on the Global Corporate, which I know you identified as a key priority area. And I noticed the growth is still very strong. That means, obviously, this can be a largely moving line because of large deals. But is it a fair assumption that some of this growth is likely to continue? And also, on that same question, if you could comment also on the pricing, the Global Corporate clearly bucking the trend and what we have seen in the rest of U.S. -- or in the U.S. from all your peers as well? And secondly, just wanted a quick clarification on the Life side. I think it's in this piece somewhere there was a mention of ZZR in fourth quarter, if I'm mixing it right. And so I just wanted to understand how much of fourth quarter bulk had any impact from this [indiscernible]?

Martin Senn

Thank you, Vinit. Second question goes to Kristof, first one to Mike. But let me tell you as well, we are very pleased on the Global Corporate performance for last year. It's about 10 years since we have established this business as a true global function, and we were showing a record year in all terms, in terms of growth, in terms of profitability, combined ratio around 92, ROE around 18%. So good, good development. But Mike, you want to give a bit more flavor on that, please?

Michael Kerner

And so as you say, Martin, we're very pleased with the progress of our corporate business. And I would say corporate, not just on the GI, but also on the Life side in 2013. The team's working together, as we discussed previously. It's pretty remarkable that the progress we've made on that. And we've got quite a lot of momentum going in that space. So clearly, we continue to have this as a growth priority for us. It's an area where we intend to invest going forward in our capabilities in making sure that we are able to serve customers as best we can. So certainly, with that momentum, we would be looking for growth going forward, although, of course, hard to peg a specific number at this point. In terms of rate, I think that the rate has held up fairly well in that portfolio. And it is a book of business, of course, that's underwritten on a case-by-case basis. But as individual accounts and individual customers need rate action, we'll continue to take it as we need to. And so far, through the end of the year, the market has supported our ability to get it. So we feel pretty good about the business pretty much from soup to nut.

Vinit Malhotra - Goldman Sachs Group Inc., Research Division

And I'll just ask quickly, is there any particular sectors where there's more growth opportunities, or is this across the board?

Michael Kerner

Well, the way we look at the business is we look at the large domestic programs versus the large international programs. And the international programs are where we think the biggest opportunity exists because of the continuing increase in global trade, and on top of that, the continued interest of companies having a holistic risk management program that's global in nature rather than buying their insurance country by country by country. And we're one of the few carriers that have the capabilities of providing those services to companies. And we do it very well, and it's a distinct competitive advantage for us. So that's where we think we've got a lot of opportunity. And that's where we've seen quite a lot of the growth over the last couple of years as well.

Kristof Terryn

Just on the ZZR, so in 2013, the charge -- the ZZR charge was [indiscernible] 2012, so just under EUR 200 million. Now where it comes to in the bulk you see it in the other profit margin in the profit by source. The reason that I actually came down from $110 million to minus $207 million as [indiscernible]. Their holder discretionary allocation has actually increased, and that's a result of different statutory movements.

Vinit Malhotra - Goldman Sachs Group Inc., Research Division

And this is in fourth quarter?

Kristof Terryn

No, that's the full year.

Operator

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

Andrew Ritchie - Autonomous Research LLP

Just 2 questions. First of all, for Mike, on the outlook for the combined ratio. You say on Slide 21 improved combined ratio. Now I guess, that allows for a normal level of large losses. But just looking at the underlying -- in terms of the underlying loss ratio, how much of that do you expect to improve from continued earn-through of better rate than loss cost, or how much of it is just specific underwriting actions? I guess I'm trying to gauge -- do you still see rate ahead of loss costs? And is there any more color on which particular books you think have the scope for improvement in '14? Second question for -- I think you -- I think Jeff is there, Jeff Dailey. Farmers, I mean, it feels like we have a transition year every couple of years. And the sort of degree of shrinkage in Q4 seemed to surprise you, judging from the commentary. Can you just clarify what really happened? Was it the market was a lot more price sensitive than you thought? And I'm still struggling to see why you're so confident of the positive signs in Q4. It doesn't seem to come through the numbers. And maybe a bit more granularity on that would be helpful.

Martin Senn

Mike?

Michael Kerner

So perhaps, I should start. So on the question on the combined ratio, I think, where we have the opportunities for improvement, clearly, are really falling to 3 categories. The first is that we have already, in 2013, achieved rate that we think is in excess of the loss cost trend. That will earn in and continue to earn in over 2014, so that will provide some benefit associated with that. Of course, rates for us continue to hold up reasonably well, so that may even continue into 2014 on that basis. The second piece is that even with the holistic rates across the whole portfolio, you'll recall that our focus is in on portfolio management and that you're sure we're dealing with individual accounts in the appropriate way. So our 9-box grid, our tiering approach provide us the opportunity to generate underwriting improvements even in a market that doesn't support rate increases. So that will clearly improve. And then the last piece is that we've seen some drag, particularly on certain portfolios. I would say international markets would be one of the areas. One of the places that we're growing as you invest in growth, as you bring new business on, you would expect that in the beginning, those portfolios would underperform to what you would expect they would be over the long term. So as these portfolios mature and as we take action to fix them, we would expect to see some improvements, particularly in some of our international market business, Latin America for example. So those are the opportunities to see some improvement going forward.

Andrew Ritchie - Autonomous Research LLP

And so now, rate on new business continues to exceed loss cost you think?

Michael Kerner

Well, we got 4 points -- a little more than 4 points in the fourth quarter, and I would say that that's ahead of inflation at this point on a global basis. So, yes, we think that the fourth quarter continued to play out. And -- too early to get returns from the first quarter in terms of what we've seen, but it held together pretty well in the fourth quarter.

Jeffrey John Dailey

Andrew, it's Jeff. So a fair comment about lots of transitional years at Farmers. But we really do think this is a transitional year. And as we looked at the acceleration of the decline in the fourth quarter, it's really a factor of a couple of things. First of all, it's really was about retention. And our property policies are all annual policies, so the rate that we took in 2012 really started hitting renewal customers in the third and fourth quarter. On the auto side, we had similar issue with retention, and it really was retention that actually drove that number down in addition to us combining the 21st Century in Farmers brand into one and losing sort of the gap on the 21st Century brand. In terms of the shrinkage [ph] that we're seeing, we saw the retention stabilize at the end of the fourth quarter, and we also saw new business counts, which have been down pretty significantly throughout all 2013, actually recovered in the fourth quarter and get to the area of flat. So I think, as we move forward in the transition, we are seeing signs that we're starting to see new business recover, retention stabilize. And from a combined ratio perspective, we're actually at the point where we don't need to take more than inflationary increases in the marketplace.

Andrew Ritchie - Autonomous Research LLP

And just to be clear, the sort of rebranding or, I guess, getting rid of 21st Century, does it mean you're actually weren't spending on marketing at all really in Q4 or that it was minimal?

Jeffrey John Dailey

It was minimal, and actually, for -- most of the year but accelerated into Q4. And really, all we spent would've been on direct mail and commission aggregate or so. No general media marketing at all.

Operator

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

Marcus Rivaldi - Morgan Stanley, Research Division

First question is on restructuring costs, please. Just going back to the guidance you gave at the Investor Day. You talked about 2/3 in Life, 1/3 in GI, 2/3 below the line of '13 BOP. Can you may just revisit that guidance please in light of what we've seen so far, and what we should be expecting into the rest into 2014, please, and particularly, where those restructuring costs will land? And then, looking back to what you took in at Q4, how they will split between Life and non-Life, please? And then the second question is on North American Commercial. I mean, a stunning combined ratio we saw in Q4, the 89%. Can you talk a little bit more about that exactly how that was achieved and the prospects of that particular segment going forward as well?

Vibhu R. Sharma

Marcus, it's Vibhu. Let me address those. I'll start with the restructuring costs. At Investor Day, we mentioned $400 million to $600 million in Q4, as I've mentioned previously. It exactly is roughly $318 million. If you look at that $318 million, call it, $210 million, $215-ish million was specifically GI and the remainder of Global Life. And obviously, most of the GI is specifically related to the Russian Retail on the goodwill. As we look forward into 2014, I expect us to be pretty much at the $600 million number. And I would expect that I would see more of it coming through Global Life than GI. So that would be, to me, pretty consistent with the statement I made in December. As it relates to above the line or below the line, i.e. in BOP or out of BOP, if you look at Q4, roughly $30 million was in BOP, and the majority of it outside of BOP. And as again, I sort of mentioned that earlier in my comments, as I think about the remaining sort of $300 million, I'm just giving you round numbers here now, still expecting about 1/3 in BOP and 2/3 out of BOP. But it's really difficult at this stage to be any more precise, and that's the best I can tell you on that.

Marcus Rivaldi - Morgan Stanley, Research Division

Just quickly -- before we move on to Global [indiscernible]. Can I just ask about the GI part of it? So when you talked about roughly 1/3 GI to $200 million, you effectively used up pretty much the entirety of that budget just from Russia? Is that what you were only expecting in terms of restructuring costs in GI that is all going to be -- you thought it was all going to be the Russian business or is there anything else out there...

Vibhu R. Sharma

I would say that was the large and majority part, yes.

Marcus Rivaldi - Morgan Stanley, Research Division

Okay. So there could be some more to come in GI beyond...

Vibhu R. Sharma

It's not in that headline figure as the Russian Retail has been. On the NAC, Q4 was an 89. It was a very good quarter. I would tell you, one quarter, I wouldn't read anything into one quarter, good or bad. If you look at Q4 specifically for NAC, they had a very, very benign cat and a very benign large loss quarter, so very loss-free on large and cats, and that certainly helped. And then as we go through our prudent review of our reserves each quarter, they also had some favorable benefits, favorable PYD as well. So a very good quarter, but I wouldn't draw or extrapolate this on one quarter.

Marcus Rivaldi - Morgan Stanley, Research Division

What was the significant amount of PYD?

Vibhu R. Sharma

I don't have the exact number with me, but I think somewhere -- it's hard to -- probably approximate, somewhere probably around 2%.

Operator

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

Stefan Schürmann - Bank Vontobel AG, Research Division

I have 2 questions. First one is on the net cash remittance, you will show that like an expected $3 billion of net cash at the Investors Day. Now you finally end up at $2.2 billion -- $2.9 billion. And just to make sure, at the time of Investors Day, you said that the new China Life gain was not included, and I assume that is still the case. I mean, can you explain, Martin, why is it the case? if [indiscernible] not in? The second question is just simply on asbestos and the environmental. I haven't seen any update here. Could you give us maybe some update on the reserve movements there, and potentially, the 3-year survival ratio?

Vibhu R. Sharma

On the net cash remittance number, just a couple of items. We had highlighted the $9 billion target or in excess of $9 billion target over 3-year period of 2014, '15, '16, so over the 3-year period. And as it relates to 2013, I think we had an estimate. We came in pretty close to it from really minor timing differences of net cash remittances from our various operating units. As it related to the new China Life to sale, that was actually already -- that investment was actually held at the corporate center, so therefore, it was not a cash remittance coming up from a unit already up to the holding company that's sort of already there. On your question as to -- it was a -- on asbestos, I will probably have to get back to you on that. I don't have that level of granular detail with me or maybe...

Michael Kerner

In this -- this is Mike. So we'll have to get back to you on the survival ratios and things like that. But we did -- as per our normal process, we did do review of the reserves in the U.K. and found our position in the U.K. broadly to be in line with where that review was. So...

Stefan Schürmann - Bank Vontobel AG, Research Division

So there was no major movement there?

Michael Kerner

No material movement, right.

Operator

The next question comes from Mr. Ralph Hebgen from KBW.

Ralph Hebgen - Keefe, Bruyette & Woods Limited, Research Division

It's Ralph Hebgen from KBW. Just one thing. It's a question relating to your comments, which you made on Slide 13 in the speaker notes. And you were saying that you look at every major loss and then continue to investigate this. And that growth that you build leverage your insights into a risk engineering capability review of some description. So my question is, would you be able to elaborate on that process and what that will entail? And also specifically, whether an investigation into the incidence of large losses will be part of that investigation into risk-engineering capabilities?

Martin Senn

Hi, Ralph. Maybe just to pre-comment for Mike to take the question. Maybe you want to talk about large losses altogether and as part of that question? It might come up later, I think.

Michael Kerner

So we've, of course, talked about large losses and addressed large losses at the Investor Day, and on an ongoing basis, our approach from a large loss perspective is really, really twofold: First of all, when we have a large loss, let's make sure that we understood that it was in the pricing and make sure that we've got it appropriately in the price that we charge the customers for the coverage. And then the second piece is, let's see if we can learn something in terms of what generated the large loss and how it should be fed into the underwriting guidelines or to our underwriting approach. That's also determine with -- whether a specific underwriter, perhaps, made an error or made a mistake in the underwriting that we can actually use that as a learning opportunity to improve our processes going forward. So fundamentally, that's what we're doing. Now on -- a good number of these large losses, of course, comes from the property side of things. On the property side, we have a wealth of information from our risk-engineering surveys that allow us to compare risks to each other and allow us to compare them to benchmarks, allow us to share that information with customers so that they can target remedial actions around the kinds of hazards they have in their plants. That -- those tools and that analysis and the ability to do those comparisons, we're continuing to make improvements in. And those are feeding more directly now into the underwriting process so that we have a very clear idea, not only of the opinion, but how the opinion on a particular risk compares to others in the portfolio. So that's a piece of what we're doing to try to make sure, again, that we've got the right pricing, the right underwriting guidelines, that we learned from anything that comes in that might be a mistake, but in the end, if we are charging for it and we're charging an appropriate price, this is what we're in the business of doing. We're in the business of helping our customers understand and protect themselves from risk. And sometimes that manifests itself in a large claim, and we're willing to do that as long as we get paid for it.

Ralph Hebgen - Keefe, Bruyette & Woods Limited, Research Division

Can I just have one follow-up on that. I remember at the Investor Day, you were saying that there is really nothing you could do about the trend of large losses or that there was, perhaps, no discernible trend. And you were guiding to expect, in future, a further 10 percentage points for the aggregate of nat cats and large losses. Is this sort of sentiment still something which you would uphold in terms of the severity of the combined impact of large losses in nat cats going forward?

Vibhu R. Sharma

Ralph, this is Vibhu. Just a couple of things. One, I wouldn't be guiding you. I think, I would just, say again, look at -- if you look at the last 5-year average, you would see it's about 10%. I think just to reiterate a little bit from Investor Day, 2 things: One, we had seen a growth from 2010 to 2000 -- sorry, 2010 to 2013, and I think we highlighted about a 1.1 point increase in that. Half of it was from our growth in our Global Corporate business. And if you look at that business, it had good growth and also had a combined ratio of 92%, which is, obviously, pleased with. The other key point, I think, is to look at the large loss collectively with our attritional loss ratio. And if you see that the disclosures we're showing in the summary of the 2 as well, you'd actually, again, from 2010 to 2013, see a 4.6 point improvement. I think, that's just another point to highlight. So we have added some additional disclosures in the book which we hope will be helpful to you.

Operator

The next question comes from Mr. Atanasio Pantarrotas from Kepler Cheuvreux.

Atanasio Pantarrotas - Kepler Cheuvreux, Research Division

I have 2 questions. The first one is on Life business. If you can provide some more color on what is the situation of your book, especially in Germany and in Switzerland? What is the amount of the premium income every year? And if you bear risk regarding the minimum guaranteed level to the policy order. And on this regard, what are your expectations regarding the future investment income of the Life business operating profit? Second question is if you can provide some update regarding the -- weather [indiscernible] events impact happened at, especially, in U.S. in January?

Martin Senn

Kristof, you take the first, and Mike -- Vibhu, I mean, Mike, the second.

Kristof Terryn

Maybe just maybe a couple of points on the Life books in Germany and Switzerland. So I would say, overall, and you've seen under the new business margin, I think it's important to understand that we keep pushing the protection on the unit-linked side because the traditional guaranteed products are difficult in the current low-yield environment. So when you look at where our new business production comes from, you will see that continued shift towards protection and unit-linked. Now if you ask about the investment margin, and you've seen it in the 2013 results, I mean, that has continued to come down, which basically explains the decrease in bulk because even though expense margin and risk margin has grown, it hasn't grown enough to offset that. Somewhere in 2014, I see that trends reversing. The investment margin may continue to show some smaller declines, but I think the growth -- the continued growth on the risk and the expense side should be able to offset that somewhere in 2014.

Michael Kerner

I think the other question was from January in the U.S., losses maybe you referred to or coming from -- I think some people are referring to as the polar vortex other than some of my friends and family members that are still in the U.S. that have been freezing, I think from a loss perspective, it's not something that is significant. We do -- are obviously impacted that -- on that. I think if you look historically, we have tended to highlight when we have major catastrophes, and it's not something that we would, today, would fall into that category.

Operator

The next question comes from Mr. Jason Kalamboussis from Societe Generale.

Jason Kalamboussis - Societe Generale Cross Asset Research

A couple of things. One, it is on Farmers and Farmers Re. On Farmers quickly, on following up on Andrew's question, when are we going to have -- when do you think we'll get the quarterly growth is going to be zero or above? That means second [ph] and end of the fourth quarter was better, but what we can see is worse. Now you say there is a turnaround, but does that mean that we're reaching the zero in the first half? Or is it more towards the second half of 2014? And looking at Farmers Re, now that we have admittedly at great cost, that covered an aggregate color within Farmers Exchanges. You had only a timid reduction of the 18.5% to 18% in this quarter. Do you expect to see small quarterly progress? Or do you see that we're going to have a bigger gap, notably when we are going to cross the second quarter, where typically, you have had more losses coming through? And the second thing is just OOB. You had -- when I'm looking at 2010 and '11, it was $800 million; 2012, $900 million, now it's $1 billion guidance. I thought that the fourth quarter was more about branding and the one-off. And maybe some catch-up on the -- on your overhead costs -- over head of costs. But does that mean that OOB now -- what has driven that line coming from $800 million to $1 billion? And what would reassure that we're not going to see that continuing to creep up?

Martin Senn

Jason, let Jeff will take the first 2 questions, and Vibhu the question on OOB.

Jeffrey John Dailey

Okay. So, thanks. I don't want to predict a quarter where we are going to see positive growth. What I would do is I just reiterate what I said before, we have seen new business stabilize and start to grow whether we've seen retention stabilize, and then some places start to grow, and it's actually relatively simple insurance math that those things have to, sort of, cross the line first before we'll see growth. Our expectation is that we will see growth in 2014, and so the signs there are positive. In addition, we really started in earnest really working on what we call Omni-Channel, which is starting to drive Farmers business through the 21st Century channel we bought. That's in the early days. So our expectation is that we will see growth in 2014. I don't want to pin it down by quarter. With respect to the quota share reinsurance, the decision to buy quota share reinsurance is actually done by the Exchange's Board of Governors. And the 18.5% to 18% really is their decision to actually diversify somewhat where their reinsurance risk is. Relative to where we're at in terms of our long-term goals of minimizing toward eliminating the quota share, we had a very good quarter in the fourth quarter. And we are at about the top of the range that we talked about at Investor Day. I think if we can carry through sort of couple of quarters, that's something that the exchanges will look at again.

Vibhu R. Sharma

Regarding OOB cost, they are going back to the changes from the last few years. The primary driver of that is really the higher holding and finance costs with HQ [ph] basically broadly flat, net of the recharges to the segments. Now as far as the H&F cost, the Holding and Finance cost, the main driver of that is lower investment income. And the lower investment income is coming from 3 main factors: First is low returns on cash balances that are held there. Second, the repayment of the surplus notes in our North American Commercial business. And third, lower interest rate charges on intergroup loans than, really, the 3 aspects. The latter 2 of those, the repayment of surplus notes and any fee [ph] and lower interest rates on intergroup loans, those really have no effect on the group as a whole. So that's just from one downside. [indiscernible] You're right. Now as far as overall, it is something we're working on to reduce the OOB costs, and that is very much focused on HQ [ph] expenses, and that's part of the effort we have on reducing our complexity and overhead burdens.

So with that, that's why I, sort of, just go back to the point I made of going forward of roughly about $250 million a quarter or $1 billion a year.

Operator

The next question comes from Mr. Thomas Seidl from Bernstein.

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

First question is on BOPAT ROE. Basically we noted that the full year number fell to 11.6% after 12.1% at 9 months. Now it was, I think [indiscernible], I wonder, Martin, what makes you comfortable to reach the 12% or even the upper end of the 12% to 14% range of BOPAT ROE target over the next 1, 2 years? And the second question is on Life. Noted here that apart from Santander, all areas trending down, particularly U.S. and Asia. I wonder if you could give some color, what are the underlying issues here? How are you going to address it, and how should we think about this going forward?

Martin Senn

Thank you very much, Thomas. Well, the 11.6% of the BOPAT ROE, obviously, compares with 10.5% that we have been reported and moving forward, we will report in that format. The 12% to 14%, I mean, that's clearly a reflection of our strategic prioritization. I need to continue investing in our distinctive positions to, as well, look to manage businesses and serve in turnarounds. And we have indicated now one example of how to go about that with investigation. It will be we'll doing with our Russian Retail business. We have streamlined already some of the areas with regards to inefficiencies. For example, last quarter, the management structure in the Middle East. And we continue growing through these strategic cornerstones, which, in our internal plan, and clearly leads to an ROE 12% to 14%, and I have as well said at Investor Day that to the end of that strategic cycle, i.e. 2016, we are ought to see that number edging up from 12% then sticking around 12%. And that's basically where we do come from, and we will continue reporting you back on a half-year basis on where we stand with regards to the execution against our strategy along the 3 cornerstones and the next report you get then with a half-year reporting cycle.

Kristof Terryn

Hi, this is Kristof. Just on the Life side. So while it's true that Santander has shown the best growth, I mean, that 52% growth in your business value year-over-year, the underlying growth rates in both Latin America, North America, but also in APME, even in Europe, new business value growth has been positive. I mean, bear in mind that in Latin America, when you strip out Santander, you should also think about the impact of ZS [ph] last year and the underlying growth is actually positive organic growth in Latin America. So and then APME showed a 33% growth, north America, 7%.

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

Sorry, I'm some thinking about operating profit. I'm also keen on new business values. Operating profit is down in U.S. and Asia, and I just wonder what are the underlying reasons it's really sharp down in the U.S. and also to the some extent in Asia. Is there anything specific? And I think I noted in your video message or in your letter to shareholders that you are quite bullish on the U.S., for instance, as ever. How you're going to address the situation there?

Kristof Terryn

So one of the things that you would have seen in the profit by source now. I mean, the development costs have actually gone up year-over-year. And so the investments that we made in the U.S. in the iPay [ph] channel, but the investments we've made in Asia as well are some of what drives the impact on the cost side.

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

So it's nothing fundamental? It's the initial startup costs, you think?

Kristof Terryn

That's exactly right. Yes.

Operator

Your next question comes from Mr. Daniel Bischof from Helvea.

Daniel Bischof - Helvea SA, Research Division

Just one question remaining for Mike. On GI in Germany, you had a combined ratio, was it 110% in Q4? Was this purely result of the storms in Q4? Or was there anything else? So, I guess, Kristof is already happy with the underlying performance in Germany.

Michael Kerner

So thanks for that question. I thought for a second, we get a quarter without a question on Germany. But apparently, apparently not, but nonetheless, so we are very pleased with the developments in Germany. The team did a great job in terms of getting their hands around that business and moving it productively forward. And we have some new team members on the ground in Germany, and they're settling very, very well, and we're very pleased with the developments in the business in Germany. In the fourth quarter, we had a -- we did have a one large surety loss that hit the portfolio there. Not actually out of Germany, but one of the things that was on the balance sheet there. They are the center of excellence for surety so it was on that balance sheet. We also had a little bit of adverse prior-year development, which hit the fourth quarter result on a standalone basis. But just basically, relatively noise in the big picture of things. And we saw the attritional loss ratio actually improve by about 7 points, which is really what we look at as the key driver of that business. So like I said, we're pleased with what the team has done in Germany. We're pleased with the direction the business is going, and we're very optimistic for the future for GI in Germany.

Operator

Next question comes from Mr. Andy Broadfield from Barclays.

Andrew Broadfield - Barclays Capital, Research Division

Two, actually very quick ones. Just on the investment income. I'm a little confused about how you see the, sort of, I guess, the next 1 or 2 years developing. you are talking about flattening investment income. I was just wondering whether you can give us a sense of whether that is -- [indiscernible] for the next couple of years. Is 2014 still a down year for you? And net-net? And also I just want a vision, are you seeing those pressures easing more on the Life side, on the spread side? Or is this more about GI being able to get a little bit more? I'm just thinking about the shape of that interest curve? And #2, just on reserving side, it's not hugely just Spain. Do you have any reserve additions there for, I think, [indiscernible] just took a bit of a charge there in anticipation of some of the changes in Spain? Do you see anything there, or were you planning to doing anything there yet?

Martin Senn

Vibhu?

Vibhu R. Sharma

Yes, regarding investment income, if the way I would articulate that is, as I mentioned, we have seen a slowdown in the decline as we went through 2013. We are expecting a more flattening out over the next couple of years. So we would expect to see the decline reduce as we get into the next couple of years. But we are -- we do believe it's starting to flattening out. Hopefully, the Central Banks don't take any actions to continue to change the reference rates. But you're seeing -- we're seeing that. And I would say, that's obviously very much on the GI side. Anything on the Life side, we are likewise seeing a flattening out over the next, again, couple of years. With respect to Spain, I'm not aware of any specific items that we have taken on that. So that's the best I can tell you on that.

Martin Senn

Just to, maybe to add, Andy. I recall, I'm not sure it was with you, a conversation at one point where we showed that in the first 6 months last year, the decline in investment income attributed in GI was about $200 million. In the second half, it was $100 million, which kind of showed on -- the actual rate is flattening. And actually, that will be more accelerated now into this next year but still with a minus in front of the number.

Operator

[Operator Instructions] The next question comes from Mr. Niccolo Dalla Palma from Exane BNP Paribas.

Niccolo Dalla Palma - Exane BNP Paribas, Research Division

Two questions for me. Just one for Kristof very quickly on the -- you mentioned intention to simplify -- actually a plan already existing to simplify the management structure in the Global Life side, just if you could say something more on this. And secondly, in the past, in your Annual Report, you used to break down quite in detail the reserve per reserve from Global Corporate, NSE [ph] Europe. And other. I just wonder, I can't find it for the moment, maybe it's just me, but I don't know if these numbers are available already like in the past.

Martin Senn

Niccolo, before Kristof takes the question, I just want to clarify, this is not the simplification referring to in Life. This is really a group strategic emphasis. We have a project in place on where we look on how to simplify the organization to become much more at site [ph], closer to the market. Long constraint, of course, is the regulatory environment and the governance of running the business and different jurisdictions. But overall, that's what we're pushing through for the group as a whole. I expect for the analysis and big part of the implementation to close towards the end of the year, maybe latest beginning next year, but that's about the timeframe we're talking about. And Kristof and Mike have done -- made some early strikes [ph] with a bit more to come, I suppose. Maybe he's going to give us now a bit more of the detail.

Kristof Terryn

It just on the Global Life management structure. I mean, it, in essence, follows a strategy that we announced in December of last year. I mean, the 4 regions remain intact. The biggest change is on the pillar side, I mean, what you now see is that we have 3 global pillars, in essence: The bank distribution, the corporate life and pensions business, and an in-force management, which is a new team that we are starting up, which is driving the whole transformation in terms of what we want to accomplish with in-force management on a major backbone. And then we've combined a couple of functions, very much in line with the team that Martin referenced to, to just try to simplify things, get a smaller team that is much more focused on execution.

Martin Senn

On the same, Vibhu will just take the second question, but on the same note, I also want to highlight an initiative we took in the GI business last year. It goes in the same chapter where we delay the original management structure for the Middle East. And this role of flipped up layer into the managing of Europe and Africa altogether, leading, obviously, as well to simplification and to reduction in overhead cost burdens. Vibhu?

Vibhu R. Sharma

Yes. With respect to your question relating to more detailed information, as it relates to reserve information, we show the aggregate, and that's what we have shown in the previous quarters for GI. We do obviously do break down, my guess, you've probably seen that in pages 30 to 32 where we do break down our operating profit and our top line and rate activity between our Global Corporate and North American Commercial, Europe pieces within General Insurance.

Niccolo Dalla Palma - Exane BNP Paribas, Research Division

Okay. Because results in the past Annual Reports used to give the breakdown of the 5-year development, so that we won't find that this year. Just to make sure I'm not missing it.

Martin Senn

We can go check. I'm not clear of that.

Operator

We have a follow-up question from Mr. Michael Huttner from JPMorgan.

Michael Igor Huttner - JP Morgan Chase & Co, Research Division

On Russia, can you say how much money you'll save from the restructuring or whatever you are doing there? That will be very helpful. And then on Farmers, and I know you claimed you can do more of this at the half year, but could you simply give an idea of this, I can't remember what the name is, a multi-something or other. How expensive is it to kind of unify the offerings, so the client can see it whichever channel he chooses on the channel area? Are they $50 million order size? Or is it like $200 million or $500 million? Just have an idea because probably it's huge business on that. I have no way of picturing it.

Martin Senn

Let me take the Russia question, Michael. What I need to stress is that the Retail Russia result has been included in the Rest of Europe column. We don't break the result out, but it's fair to say that this business has been loss-making for the last 2 years. The reason for that is partially external factors. There's been quite some change in the consumer protection law that has been introduced late 2012. And it had a significant impact, particularly within retail and motor. And this is obviously, as you know, this is the bulk and the main part of the portfolio we have. And then in line with the rest of the market, we have experienced significant increases in the number of claims which are being referred to courts with a relatively low success rate in defending the claims and also leading with that to higher awards to claimants. What I need to stress is that we're talking just about the Russian Retail business in the context of Zurich, but we are not looking at this the Global Corporate business in Russia, which is an area which will remain a key part of our offering to our customers.

Kristof Terryn

So on the Omni-channel question. I can't give you any specific numbers. And I can tell you we're actually operating in Omni-channel today. And what we're doing is we've made some basic investments, so we're not significant that actually tied some of the billing and web functionality with some of the things that the agents and customers could see together. I think as we go on into the future, we could spend more money, but we're not talking about gigantic sums of money. This will be sort of abnormal investments that'll make -- that have been -- probably, not even in the run rate of what Farmers has made in the past.

Operator

We have another follow-up question from Mr. Jason Kalamboussis from Societe Generale.

Jason Kalamboussis - Societe Generale Cross Asset Research

Very quick ones. [indiscernible], I think, Vibhu, you said before, you mentioned the $600 million as a restructuring cost. So it seems that now we have moved to the upper end of the range. One, which is within Russia or something or anything else. Was there anything that was likely worsen your expectation in the beginning of December? And where can we take some comfort that, probably, we will stop at that number? And the second one, quick one, is on the slide on the reserves. If you look at the development 2 years later of reserves, so it's your slide, I think, 38, 2011 seems to have positive development, which is good, but they are very small. Is there any comment you would like to make on this?

Vibhu R. Sharma

Thanks. Let me -- I'll start with the triangle that I have in front of me. Yes, again, I go back to the comment I made before, our reserving process is quite robust and something that we look at quarterly and annually. So and that process remains unchanged. As it relates to 2011, I -- there's many, many, many moving parts, pluses and minus in this, but there's nothing that I would highlight or flag that is unusual or different than in any other specific year, so that's what I would comment on, on the loss ratio. On the question of the $400 million to $600 million, we have and continue to look at the areas where, as far as implementing our strategy and as I mentioned, I would expect more of that coming in the first half of 2014 from the Global Life side. So as Kristof is looking at the various parts of our business and what some of those are at, I don't -- can't predict the future and can't see -- can't give the guidance. But I can tell you that we are actively looking at the various parts in implementing a strategy. And as we execute those strategies, we'll take the charge appropriately in the first half.

Martin Senn

All right. I think we have to come -- sorry. I just got a signal that there's no more questions. So we do come to an end and in closing, I want to thank you again for participating. We have delivered robust results for 2013. I think it's a solid operating profits in all our core businesses. We have delivered good growth in our priority channel insurance and Life markets, while the transition at Farmers continues. The group continues to generate strong cash flows, and we remain well capitalized with high solvency, which is at the high end of our AA target range. And that has given our Board of Directors the confidence to propose a very attractive dividend, again, of CHF 17 per share. Now we have set out a clear strategy to you back in December for the cycle of 2014 to 2016. We have clearly identified priorities for 2014. We showed to you today, again, and actions are on the way to continue pushing for these actions to be implemented. I think we are well positioned to deliver on the goal we set out on the Investor Day of delivering strong total returns to our investors. And I do very much look forward to updating you on our progress on these priorities. That's the next time at the half-year. and we also would publish the first profile or report cards. We have also introduced -- at least the concept we have introduced back in December.

And with that, I thank you all in the name of all my colleagues with me today for your attention, for your good questions, for being with us and your trust, interest. I wish you a good rest of the day and good luck in the markets. Thank you very much.

Operator

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

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