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Executives

James Quin – IR

Martin Senn – CEO

Vibhu Sharma – Interim CFO

Kristof Terry – CEO of Global Life

Mike Kerner – CEO of General Insurance

Jeff Dailey – CEO of Farmers

Analysts

Paul De'Ath – Royal Bank of Canada

Michael Huttner – JPMorgan

Farooq Hanif – Citigroup

Vinit Malhotra – Goldman Sachs

Andrew Ritchie – Autonomous Research

Marcus Rivaldi – Morgan Stanley

Stefan Schuermann – Bank Vontobel

Ralph Hebgen – KBW

Atanasio Pantarrotas – Kepler Cheuvreux

Jason Kalamboussis – Societe Generale

Thomas Seidl – Bernstein

Daniel Bischof – Helvea

Andy Broadfield – Barclays

Nicolas Depalma – Exane BNP Paribas

Zurich Insurance Group (OTCQX:ZURVY) Q4 2013 Earnings Conference Call February 13, 2013 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 conference call operator. (Operator Instructions). At this time, it's my pleasure to hand over to Mr. James Quin, Head of IR and Rating Agency. Please go ahead, sir.

James Quin

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

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

Martin Senn

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

Zurich’s business operating profit for the 2013 financial year was $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 and priority challenge terms and globalized markets. Farmers continues to focus on implementing its new strategic direction while at the same time delivering Brazilian margins. Our results and strong cash generation have given our Board the confidence to propose an attractive dividend of CHF17 per share reflecting continued strengths 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 three cornerstones of our strategy. Namely investing in priority markets, managing all the business for value and growing our operating areas is are the cornerstones we have set out.

Now these priorities will 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 set 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 in our strategy

I will now hand over to Vibhu who will take or will make few points on our results before we move to Q&A. Thank you very much. Floor is yours Vibhu.

Vibhu Sharma

Thank you Martin. I will make a few short introductory remarks on our results. First in General Insurance, we grew gross written premiums in our priority markets by 5% in local currency, adjusted due to excluded one large fronting contract. We reported a combine ration of 95.5% for the full year and 96% for the fourth quarter. There are few moving parts in Q4 which I wouldn’t extrapolate. Most parts of the portfolio produce very good results but we have a few pockets where we think we can improve. The year-over-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 cost. Our key for Life operating profit includes $30 million of accounting charges related to our decision to exit the Hong Kong (indiscernible) agent business. In terms of Farmers we see very positive signs as 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 retentions looked 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 cost that I mentioned at the time of our Q2 results and overall head quarter costs for the full year were in line with 2011 and 2012. We would see the current run-rate for total OOB expenses including financing cost at around $1 billion a year. Lastly on restructuring cost 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 5th.

In terms of where these cost 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. Off the balance of the 300 million we expect to incur in the first half of 2014 we expect around a third 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 underpin the proposed dividend of CHF17 per share. And as Martin has made very clear our priorities now 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 Paul De'Ath from Royal Bank of Canada. Please go ahead, sir.

Paul De'Ath – Royal Bank of Canada

Couple of questions please, firstly on the combined General Insurance and Global Life corporate line that you’re looking to promote as an area of your investment. Can you give a little bit more color on this kind of joint line of business and how you’re currently doing in cross selling the life services to GI customers 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 that opportunity can be, that will be great and then the second question is on Zurich Santander which is clearly doing very well and if you can just remind us please on how long we should continue to expect volatility from things like the earn-out payments from the payments and the PPA adjustments and essentially how long before this reaches a business as usual state? Thanks.

Kristof Terry

Yeah so on the first question the combined go to market approach is maybe few examples I mean both on the proposition side we look at things as its integrated absence management were 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 the 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 the Life and the GI side. So I think that gives us a very good entry point. I think the other various synergies 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, regulations, international programs. There is some clear synergies there on the Life side as well. So those are just three areas where I think we will benefit in terms of the go to market approach. Mike you want to add something?

Mike Kerner

Yeah so thanks Kristof. So just to add to that a little bit from the global corporate GI perspective we have been pursuing a strategy of product entity quite a long while in this space. We have 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 entity goes up. So the more products we can sell to a customer the more relevant we’re to them, the more we’re embedded in helping them understand and protect themselves from risk and obviously the Life and pension risk, 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, you clearly expect a volatility to go down I mean particularly on the PPA adjustments I mean those effects should largely have disappeared out of the results going forward where you will see some small impact is still from (indiscernible) adjustments going forward.

Operator

The next question comes from Michael Huttner from JPMorgan. Please go ahead, sir.

Michael Huttner – JPMorgan

The first one is on your, you know you got this lovely triangle and this is a little bit for memory but the loss pick you’ve for 2013 seems a lot lower than prior years, I think it was 69% previously you had 72% or something but just wondered why there has been this change? And the second question is on reinsurance so I think you brought more reinsurance for the same amount of money. Can you quantify the benefits or can you give a precise because I tried to compare also with the help of your colleague the reinsurance program before and now and I get very confused it’s probably my brain is too small but any help would be very grateful. Thank you.

Martin Senn

Vibhu will take the first question I think that’s on page 38 of the presentation pack and then Mike is elaborating on reinsurance which has stayed pretty much.

Vibhu Sharma

Let me do, Michael how are you, let me do the 38 first of all I will just make couple of points. First of all our reserving philosophy of our reserving process remains unchanged so that’s I think key point just to highlight, when you look at 2013 compared to 2012 I think you should think about two things. One we did have lower account losses in ’13 than we did in ’12. In addition this also reflects the improvement that we have seen in our underlying loss ratio that we have been highlighting especially when you go back to 2010.

Mike Kerner

This is Mike, so on the reinsurance piece of the equation. So I think it's 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 a $100 million. So the cover attach is 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 Farooq Hanif from Citigroup. Please go ahead, sir.

Farooq Hanif – Citigroup

Off the $300 million or so you took in restructuring charge I’m guessing the majority of that was non-cash. So if you can quantify that and then also for the remaining 300 million how much of that is going to be through goodwill, accounting rates and how much is relative hit to capital. And therefore the question are you going to release more capital and more free cash from doing all of this than you’re going to actually use in restructuring that’s actually one question, that’s question number one. And the question number two, sorry about that, the question number two do you think there is a market now opening up outside of the UK and outside of the U.S. for close [ph] 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? Thanks very much.

Martin Senn

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

Vibhu Sharma

On your question relating to restructuring cost virtually all of it I think there is just very small portion that is cash but otherwise virtually all of it is non-cash so that’s sort of point one. As we obviously think through in 2014 we’re in as part of executing our strategy at looking at various parts of our business and as we have better definition of what the actions that we’re going to take in executing those actions the impact will flow through that. I wish I could be any more 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 non-cash.

Kristof Terry

Just on the second question let me, 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 of sales of bad books [ph]. So I think the market will develop. For me from where I sit it's difficult to see the rational unless you’re capital constraint to see a large transaction of a bad book and we’re clearly not in that position. So for me freeing up the capital will have to come through the natural run-off of the book rather than wholesale transactions.

Operator

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

Vinit Malhotra – Goldman Sachs

Just I wanted to throw a bit of focus on the global corporate which I know you have identified as you key priority area and I noticed the growth is still very strong. Now there have been obviously this can be a largely moving line because of (indiscernible) 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, global corporate clearly buckling their trend and what we’re seeing 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 you mentioned the ZZR in fourth quarter if I’m missing it right. So just wanted to understand how much of fourth quarter BOP had any impact from this same? Thanks.

Martin Senn

Second question goes to Kristof first one to Mike but let me tell you as well we’re very pleased on the global corporate that performance of 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 level development but Mike do you want to give a bit more flavor around that please?

Mike Kerner

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 is working together as we discussed previously it's pretty remarkable the progress we have made on that and we have 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’re 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, it's underwritten on a case by case basis but as individual accounts and individual customers need rate action will continue to take it as we need to go and so far you know 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 nuts.

Vinit Malhotra – Goldman Sachs

Is there any particular sectors where there is more growth opportunities or is this across the Board?

Mike Kerner

Well the way we look at the business we look at the large domestic programs versus the large international programs and the international programs were we think the biggest opportunity exists because of the continue increasing 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 are one of the few carriers that have the capabilities of providing those services to companies we have to do it very well and it's a distinctive competitive advantage for us so that’s where we think we have got a lot of opportunity and that’s where we have seen quite a lot of the growth over the last couple of years as well.

Martin Senn

Just on the ZZR so in 2013 the charge, the ZZR charges referred to 2012 so just under €200 million now where it comes through in the BOP you see it in Europe profit margin in the profit by source. The reason that I actually came down from 110 to minus 207 as we have shareholder discretionary allocation has actually increased and that’s a result of different statutory movements.

Vinit Malhotra – Goldman Sachs

And this is in fourth quarter?

Martin Senn

No that’s the full year.

Operator

The next question comes from Andrew Ritchie of Autonomous Research. Please go ahead, sir.

Andrew Ritchie – Autonomous Research

Just two questions first of all from 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 on the writing actions. I guess I’m trying to gauge do you still see rate ahead of loss cost and is there any more color on what particular books you think you have this doubt for improvement in ’14. Second question is for I think you mentioned, I think Jeff is there Jeff Dailey. The Farmers I mean it feels like we have a transition year every couple of years and the sort of the degree of shrinkage in Q4 seemed to surprise you judging from the commentary. Can you just clarify what really happened, the market was a lot more price sensitive than you thought and I’m still starting to see to what you’re so confident there were positive signs in Q4. It doesn’t seem to come to in the numbers so maybe a bit more granularity and that will be helpful. Thanks.

Mike Kerner

Perhaps I should start so on the question on the combined ratio I think you know where we have the opportunities for improvement clearly are really fall into the three categories, the first is that we have already in 2013 achieved rate that we think is in excess of 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 will recall that our focus is on portfolio management and making sure we’re dealing with individual accounts in the appropriate way. So our non-box grid, our tiring 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 have 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 were the opportunities to see some improvement going forward.

Andrew Ritchie – Autonomous Research

And for now rate on new business continues to exceed lost cost you think?

Mike Kerner

Well we got four points little more than four 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 it's too early to get returns on the first quarter in terms of what we have seen but it helped to get a pretty well on the fourth quarter.

Jeff Dailey

So it is fair comment about lots of transitional years at Farmers but we really do think this is a transitional year and as we look 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, our 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 a similar issue with retention it really was retention that actually drove that number down in addition to us combining the 20% in Farmers brand and into one and losing sort of the gas on the 21st Century brand. In terms of the green shoots that we’re seeing we saw the retention stabilized at the end of the fourth quarter and we also saw new business accounts which have been down pretty significantly throughout all 2013 actually recover into the fourth quarter and get to the area of flat. So I think as we move forward in the transition we’re 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

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

Jeff Dailey

It was minimal. And actually for most of the year it accelerated into Q4. And really all we spent would have been on direct mail and commission aggregators. So no general media marketing at all.

Operator

The next question comes from Marcus Rivaldi from Morgan Stanley. Please go ahead, sir.

Marcus Rivaldi – Morgan Stanley

The first question's on restructuring costs, please. Just going back to the guidance you gave at the investor day, you talked about two-thirds in life, a third in GI, two-thirds below the line of third in BOP. If you may just revisit that guidance, please, in the 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 Q4, how they were split between life and non-life, please?

And then the second question is on North American commercial. The stunning combined ratio is, in Q4, I think, 89%. Can you talk a little bit more about that, exactly how that was achieved and the prospects for that particular segment going forward as well? Thank you.

Vibhu Sharma

Marcus, it's Vibhu. Let me address those. I'll start with the restructuring costs. At the investor day we had mentioned $400 million to $600 million. In Q4, as I've mentioned previously, it's exactly as roughly $318 million. If you look at that $318 million, call it $21 million, $215ish 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 at pretty much 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, it's 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 again, I mentioned it earlier in my comments, as I think about the remaining $300 million and I'm just giving you round numbers here now, still expecting about a third in BOP and two-thirds 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

Can I just ask quickly before you move onto global, can I just ask about the GI part of it? So when you talked about that roughly a third GI out of $200 million, you've effectively used up the entirety of that budget just on Russia. Is that what you were only expecting in terms of restructuring costs in GI? That was all going to be you thought it was all going to be the Russian business or was it anything else out there to add to the total?

Vibhu Sharma

I would say that was the large and majority part. Yes.

Marcus Rivaldi – Morgan Stanley

Okay. So there could be some more to come in GI beyond the $200 million?

Vibhu Sharma

But it's not in that headline figure the Russian retail has been.

Marcus Rivaldi – Morgan Stanley

Okay.

Vibhu Sharma

On the NAC, Q4 was 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 benign CAT, 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 based on one quarter.

Marcus Rivaldi – Morgan Stanley

It a very significant amount of PYD?

Vibhu Sharma

I don't have the exact number with me. But I think somewhere probably approximate, somewhere probably around 2%.

Operator

The next question comes from Stefan Schuermann from Bank Vontobel. Please go ahead, sir.

Stefan Schuermann – Bank Vontobel

I have two questions. The first one is on net cash remittance you showed like an expected $3 billion of net cash at the Investors Day. Now you finally ended up at $2.9 billion. And just to make sure, at the time of the investors day you said that the new channelized gain was not included. And I assume that is still the case. Can you explain why this is the case, why it's not in? The second question just simply on asbestos and the environmental, I haven't' seen any update here. Could you give us some, maybe, update on the reserve movements there and potentially the three-year survival ratio?

Vibhu Sharma

On the net cash investments [ph] number, just a couple of items. We had highlighted the $9 billion target or in excess of $9 billion over a three-year period of 2014, 2015, 2016 over the three-year period and as it relates to 2013, I had an estimate. We came in pretty close to it. There were some really minor timing differences of net cash from instances from our various operating units. As it related to the new China Life 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. It was already there.

On your question on asbestos, We will probably have to get back to you on that. I don't have that level of granular details. Mike, maybe?

Mike Kerner

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 a review of the reserves in the UK and found our position in the UK broadly to be in line with where that review was.

Stefan Schuermann – Bank Vontobel

So there was no major movement there?

Mike Kerner

No material movement. Right.

Operator

The next question comes from Mr. Ralph Hebgen from KBW. Please go ahead.

Ralph Hebgen – 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, I quote, that you build leverage your insights into the 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 incidents of large losses will be part of that investigation into risk engineering capabilities? Thanks very much.

Martin Senn

Maybe just three comments for Mike to take the question, maybe you want to talk about large losses all together as part of that question as it might come up later anyway?

Mike Kerner

So we've, of course, talked about large losses and addressed large losses at the investor day and in an on ongoing basis. Our approach from a large loss perspective is 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 have 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. Let's also determine whether a specific underwriter perhaps made an error or made a mistake in the underwriting that we can actually use it as a learning opportunity to improve our processes going forward.

So, fundamentally, that's what we're doing. Now, a good number of these large losses of course come 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.

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 learn from anything that comes in that might be a mistake, but in the end, if we're charging for it and we're changing 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 – KBW

Can I just have one follow up on that? I remember at the investor day, you were saying that there's really nothing you can do about the trend of large losses or that there was perhaps not a discernible trend and you were guiding to expect in future a further 10 percentage points for the aggregate of net CAT 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 and net CATs going forward?

Vibhu Sharma

Just a couple of things. One, I wouldn't be guiding you, I think I would just say, if you look at the last five-year average, it's about 10%. I think just to reiterate a little bit from investor day two things. One, we had seen a growth from 2010 to 2013. And I think we had 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's had good growth and also we've had a combined ratio of 92%, which is obviously pleased with. The other key point I think is to look at the large loss collective with our attritional loss ratio, and if you see the disclosures we're showing it in the summary of the two 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. We have added some additional disclosures in the book, which we hope will be helpful to you.

Operator

The next question comes from Atanasio Pantarrotas from Kepler Cheuvreux. Please go ahead.

Atanasio Pantarrotas – Kepler Cheuvreux

I have two 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 shareholder [ph]? 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-related events impact happened especially in the U.S., in January. Thank you.

Martin Senn

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

Kristof Terry

I think just maybe a couple of points on the life books in Germany and Switzerland. So I would say overall, and you've see that in the new business margin. I think it's important to understand that we keep pushing the protection and the unit-linked side because the traditional guarantee products are difficult in the current low-yield environments. 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 that in the 2013 results, 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 trend 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.

Mike Kerner

I think the other question was from January in the U.S. losses, maybe referred to are 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. who have been freezing, I think from a loss perspective, it's not something that is significant. We are obviously impacted on that. I think if you look historically, we have tended to highlight when we had major catastrophes and it's not something that we would today, it would fall under that category.

Operator

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

Jason Kalamboussis – Societe Generale

A couple of things. One, it is on Farmers and Farmers Re. On Farmers, quickly, following up on Andrew's question, when are we going to have the, when do you think the quarterly growth is going to be zero or above. That means I can understand that the fourth quarter was better, but what we can see is worse. 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 covered an aggregate cover within Farmers Exchanges, you had only a timid reduction of the 18.5% to 18% in this quarter. Do you expect to see a 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 you have had more losses coming through?

And the second thing is just the OOB. You had, when I'm looking at 2010 and 2011, it was 800 million, in 2012, 900 million. Now it's 1 billion guidance I thought that the fourth quarter was more about branding and one-off and maybe some catch up on your overhead costs or head-office costs. But does that mean that it will be now, what has driven that line coming from 800 million to 1 billion and what would reassure us that we're not going to see that continuing to creep up? Thank you.

Martin Senn

Jeff will take the first two questions, and Vibhu the question on OOB.

Jeff Dailey

Okay, so thanks. So I don't want to predict a quarter where we're going to see positive growth. What I would do is I'd just reiterate what I said before. We have seen new business stabilize and start to grow a little bit. We've seen retention stabilize and in some places, start to grow, and it's actually relatively simple insurance math that those things have to 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've 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 and 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 the 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 goal 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 a couple of quarters, that's something that the exchanges will look at again.

Vibhu Sharma

Regarding OOB costs, going back to the changes from the last few years, the primary driver of that is really the higher holding and finance cost, with HQ basically broadly flat net of the recharges to the segment. Now, as far as the H&F costs, the holding and finance costs, the main driver of that is lower investment income, and the lower investment income is coming from three main factors. The first is lower returns on cash balances that are held there. Second, the repayment of the surplus notes in our North America commercial business, and third, lower interest rate charges on intra-group loans, been really the three aspects. The latter two of those, the repayment of surplus notes on NAC and lower interest rates on intra-group loans, those really have no effect on the Group as a whole. So that is just from one side --

Jason Kalamboussis – Societe Generale

Okay, to the other one?

Vibhu Sharma

You're right. Now, as far as overall, it is something we're working on to reduce the OOB cost, and that is very much focused on HQ expenses and that's part of the effort we have on reducing our complexity and overhead burdens. So with that, that's why I just go back to the point I made of going forward roughly about 250 million a quarter or 1 billion a year.

Operator

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

Thomas Seidl – Bernstein

First question is on BOPAT-ROE. Basically, we noted that the full-year number fell to 11.6% after 12.1% at nine months. Now it was I think it was a benign claims year, so I wonder, Martin, what makes you comfortable to reach the 12 or even the upper end of the 12% to 14% range of the BOPAT-ROE target over the next one, two years. And the second question is on life. Noted here that apart from Santander, all areas trending down in particular U.S. and Asia, I wondered 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

Well, 11.6% of the BOPAT-ROE obviously compares with 10.5% we have been reported and moving forward, we will report it in that performance. The 12% to 14%, I mean, that's clearly a reflection of our strategic prioritization, i.e., the continued investing in our distinctive positions to, as well, look to manage businesses in turnarounds and we have indicated now one example on how to go about with investigation. We're doing it 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 going through the strategic cornerstones which, in our internal planning clearly leads to an ROE 12% to 14%. And I have as well said that investor day to the end of that strategic cycle, i.e., 2016, we ought to see that number edging up from 12% and then sticking around 12%.

That's basically where we come from, and we will continue reporting you back on a half-year basis on where we stand with regard to the execution against our strategy along the three cornerstones and the next report you get then with the half-year reporting cycle.

Kristof Terry

Just on the life side, so while it's true that Santander has shown the best growth, I mean 32% growth in new business value year over year. The underlying growth rate in both Latin America, North America, but also in APME even in Europe new business value growth has been positive. Bear in mind that, in Latin America, when you strip out Santander, you should also think about the impact of CIS [ph] last year and the underlying growth is actually positive organic growth in Latin America and then APME shows a 33% growth, North America, 7%.

Thomas Seidl – Bernstein

Sorry. I'm more thinking about operating profit. I'm not so keen on new business value. The operating profit is down in the U.S. and Asia, and I just wonder what are the underlying reasons. It's pretty sharp down in the U.S. and also to some extent in Asia. Is there anything specific? And I think I noted in your video message or your letter to shareholders that you are quite bullish on the U.S., for instance. How are you going to address the situation there?

Martin Senn

So one of the things that you would have seen in the profit by source, the development costs have actually gone up year over year, and so the investments that we made in the U.S. in the IFA channel, the investments we made in Asia, as well, are some of what drives the impact on the both side.

Thomas Seidl – Bernstein

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

Martin Senn

That's exactly right, yes.

Operator

The next question comes from Daniel Bischof from Helvea. Please go ahead, sir.

Daniel Bischof – Helvea

Just one question, really for Mike on GI in Germany. You had a combined ratio, was at 107% in Q4? Was this purely a result of the storms in Q4 or was there anything else? So I guess my question is are you happy with the underlying performance in Germany?

Mike Kerner

I thought for second we'd get a quarter without a question on Germany, but apparently not. But nonetheless, so we are very pleased with the developments in Germany. The team has done a great job in terms of getting their hands around that business and moving it productively forward. We have some new team members on the ground in Germany and they're settling in very, very well and we're very pleased with the developments of the business in Germany. In the fourth quarter, we did have 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 results 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

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

Andy Broadfield – Barclays

Two actually very quick ones. Just on investment income, I'm a little confused about how you see, I guess, the next year or two developing. You're talking about flattening investment income. I was just wondering whether you can give us a sense of whether that is you said over the next couple of years. Is 2014 still a down year for you, net-net? And also just by division 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 rate curve.

And number two just on the reserving side just it's not usually for Spain. Do you have any reserve additions there for I think (indiscernible) took a bit of a charge there in anticipation for some of the changes in Spain. Have you seen anything there or are you planning on doing anything there yet?

Vibhu Sharma

Yes, so regarding investment income, 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 do believe it is starting to flatten out. Hopefully, the central banks don't take any actions to continue to change the reference rates but we are seeing that.

And I would say that's obviously very much on the GI side. And I think on the life side, we are likewise seeing a flattening out over the next again couple 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 add on the I recall, I'm not sure if it was with you, a conversation at one point where we showed that in the first six months last year the decline in investment income actually booted [ph] in GI was about $200 million. In the second half, it was $100 million which kind of showed the accelerated 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 Nicolas Depalma from Exane BNP Paribas. Please go ahead.

Nicolas Depalma – Exane BNP Paribas

Two questions from me. Just one for Kristof very quickly on you mentioned intention to simplify actually plan already exists to simplify the management structure in the global life side if you can say something more on this. And, secondly, in the past, on your annual report you used to break down quite in detail the reserve releases from global corporate, NAC Europe and other. Just wondered, I can't find it for the moment. Maybe it's just me, but I don't know if this number is available already, like in the past. Thank you.

Martin Senn

Before Kristof takes the question, I just want to clarify, this is not the simplification you're referring to in life. This is really a Group strategic emphasis. We have a project in place where we look on how to simplify the organization to become much more agile, closer to the market. One 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 suspect for the analysis and a big part of the implementation to close to the end of the year maybe latest beginning next year but that's about the timeframe we're talking about and Kristof and I have done made some early strikes, a little bit more to come, I suppose. Maybe you're going to give us now a bit more of the detail.

Kristof Terry

Just on the global life management structure, it in essence follows the strategy that we announced in December last year. The four regions remain intact. The biggest change is on the pillar side. What you now see is that we have three global pillars, in essence, the bank distribution, the corporate life and pensions business and then the in-force management which is a new team that we're setting up which is driving the whole transformation in terms of what we want to accomplish with in-force management on our major backbone. And then we've combined a couple of functions, very much in line with the theme that Martin referenced 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 if you’re talking in the GI business last year, causing the same chapter where we delay the regional management structure for the Middle East and sort of flipped that layer into the managing of Europe and Africa all together leading obviously as well to a simplification and to a reduction in overhead cost terms. Vibhu?

Vibhu 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 obviously do break down my guess is, 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 America commercial, Europe pieces within general insurance.

Nicolas Depalma – Exane BNP Paribas

Okay, because in past annual reports, you used to give the breakdown of the prior-year development. So we won't find that this year, just to make sure I'm not missing it?

Vibhu Sharma

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

Nicolas Depalma – Exane BNP Paribas

Okay, we can take that offline. Thanks very much.

Operator

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

Michael Huttner – JPMorgan

On Russia, can you say how much money you'll save from the restructuring or whatever you're doing there? That would be really helpful. And then, on Farmers and I know you said you would do more of this at the half year but could you possibly give an idea of the, I can't remember what the name is, multi-something like that. How expensive is it to unify the offerings so that the client can see it whichever channel he chooses. Omni-channel, there we are. Is it on the 50 million order size? Is it like 200 million or 400 million or 500 million? Just have an idea, because it's a huge business in that and I have no way of picturing it. Thank you.

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 two years. The reason for that, it's 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 on 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 rewards to claimants. What I need to stress is that we're talking just about the Russian retail business in the context of Zurich. What we are not looking at is the global corporate business in Russia, which will remain a key part of our offering to our customers.

Jeff Dailey

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 that 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 normal investments 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 Jason Kalamboussis from Societe Generale. Please go ahead.

Jason Kalamboussis – Societe Generale

Very quick ones. The one that is I think Vibhu said before you mentioned the 600 million as restructuring cost, so it seems that now we have moved to the upper end of the range. One, it is within Russia or something anything else, was there anything that was slightly worse than 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 two year later of reserves, so it's your slide, I think 38, 2008 seems to have positive development, which is good. But they are very small. Is there any comment you'd like to make on this? Thank you.

Vibhu Sharma

I'll start with the triangle, since I have that in front of me. Again, I'll go back to the comment I made before. Our reserving process is quite robust. It's something that we look at quarterly and annually, and that process remains unchanged. As it relates to 2011, there's many, many, many moving parts, pluses and minuses 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 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. I can't predict the future and can't give the guidance, but I can tell you that we are actively looking at the various parts in implementing our strategy. And as we execute those strategies, we'll take the charge appropriately in the first half.

Martin Senn

I think we have to come -- sorry, I just get 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 the robust results for 2013, I think with solid operating profits in all of 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 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 CHF17 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, showed you today again and actions are on the way. We continue pushing for these actions to be implemented. I think we are well positioned to deliver on the goal. We said that at 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 will publish the first of our report cards we have also introduced at least the concept we have introduced back in December.

And with that, I thank you, also 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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