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Executives

James Quin – IR

George Quinn – CFO

Vibhu Sharma – Group Controller

Analysts

Andrew Ritchie – Autonomous Research LLP

Paul De’Ath – RBC Capital Markets, LLC

Vinit Malhotra – Goldman Sachs Group Inc.

Michael Huttner – JPMorgan

Andrew Broadfield – Barclays Capital

Thomas Seidl – Sanford C. Bernstein

Stefan Schürmann – Bank Vontobel AG

Niccolo Palma – Exane BNP Paribas

Marcus Rivaldi – Morgan Stanley

Ralph Hebgen – KBW

Thomas Seidl – Sanford C. Bernstein & Co., LLC

Vinit Malhotra – Goldman Sachs

Zurich Insurance Group (OTCQX:ZURVY) Q1 2013 Earnings Conference Call May 15, 2014 7:30 AM ET

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to the Zurich Insurance Group Conference Call results for the three months through March 31, 2014. I’m the Chorus Call operator. I would like to remind you that all participants will be in listen-only and the conference is being recorded. After the presentation, there will be a Q&A session (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. Please go ahead, sir.

James Quin

Welcome to Zurich’s Q1 results presentation. I’m joined by new CFO George Quinn and our Group Controller, Vibhu Sharma. As usual will make a few comments before I open the Q&A. Please keep to two questions. And I’ll now hand over to George.

George Quinn

Thanks, James. I am delighted to be on this call in my new role as Zurich’s CFO. I am really charged for this new challenge as well as I know many of you from the prior job. I also look forward to meeting you and other analyst and investors that are calling up. We have one more Quinn at Zurich Insurance Group.

One point I should make is this, it’s relatively early in my career as I’ve been here at Zurich for just more than a couple of weeks. My first day in the office was on 1st of May. So, one thing I’m very sure and can guarantee is I will not be able to answer all the questions. Luckily, we have Vibhu Sharma with me. I think most of you know him already and he has done fantastic job as Zurich’s Interim CFO over the last eight months. I’ll lean on vagarious expertise during the course of this call.

And in terms of the results, I’ll make a few short introductory remarks. First, in General Insurance, we reported quarterly good combined ratio of 93.9% for Q1. We certainly benefited from the inclusion of part of one of pension gains that has an impact 0.8 percentage points for Zurich as well as more than expected level of catastrophe losses.

In terms of underlying performance, we see continued improvement in our profitability. If you look at the exiting year loss ratio as we have some rate increases and excessive cost inflation. The best evidence for that is that roughly 1% improvement. The improvement was modest by number of other impacts, mainly related to expenses which was historically in prior year. That said, we know that we need to improve this exiting year results and we have number of actions underway to achieve this.

Previous year developments for the quarter was a positive 1.2 percentage point impact form the combined ratio, which is higher than the first quarter of 2013, but below the run-rate of more recent quarter. As most of you have probably seen from the speaker notes, I mean using the terminology that we adopted last year, we wouldn’t see this as an unusual number of 1.2% and to be a little more specific as to what we expect going forward, you should assume that we will see positive PYD of around 1% to 2% while the current steady state growing inflation environment continuous. In relation to our Life business, we had solid start in terms of both AP and new business value. Well, new business value is down when we compare to Q1 2013. Keep in mind that, we saw exceptionally strong sales of protection products in the same quarter of last year.

At Farmers, we continue to see good profitability as the farmer changes – Zurich and in addition while it remains very much a transitional year with 2% decline in gross premiums, this quarter was a marked improvement in comparison to the 4% decline that we saw in the fourth quarter last year. And beyond that, we see some positive early signals of this improved momentum should continue as we go through the year. On restructuring cost, it’s actually very less included in Q1 and as we see in there, we expect to take the majority of a remaining $250 million of charge within in the second quarter. As we mentioned in speaker notes, this is likely to be outside of both, which is a slight change to what we told you before.

Lastly, Z-ECM ratio improved to –increased to 127%, which is above the top-end of our target range and we are actively deploying additional risk capital in the business and this means that we expect the ratio to move down to 120% level over the course of this year. In summary, I see this is a solid for the year although we clearly have plenty to do to deliver on ambitions that we said at the Investor Day on December.

With that I now look forward to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Mr. Andrew Ritchie from Autonomous Research. Please go head, sir.

Andrew Ritchie – Autonomous Research LLP

Hi, there. And welcome George to your new role. I had two very quick questions. Just on mobilize reading through the speaker notes, I detect the slightly more cautious tone on the guidance on PYD or maybe I am wrong. But in relation that, on the Investor Day you provided a rough guidance as to what we should think about in terms of operating profit.

I think it was 5% average growth from sort of a normalized basis in 2013 through a combination of improvement in underlying loss ratio and investment income et cetera. Is that still your expectation? Is there any change or you’re going to signal any more caution in the overall results as normalized as a result of slightly more cautious turn on PYD?

And second question on the re-risking, just to clarify, in terms of the capital consumption of the re-risk scheme, are you basically saying it’s roughly 7 points as in the amount you are above your buffer or is that too precise number and what’s the sort of timing, do you think you achieved the re-risking over the course of this year? Thanks.

George Quinn

So thank you Andrew on both of these. On the first one, a 5% still stands and if I will make – that’s been in early Investor Day, the plan you had behind them had no PYD in it. So, the change that we’ve made in gains around PYD today have no impact on that 5% although the aim is to grow both by 5% for GI. So hopefully, you want to take some more cautious tone around that commitment.

On the capital consumption rate, I think it’s too precise to say that what we’re planning to do on the asset side, we’ll take it precisely from 127% to 120%. We have a number of initiatives running both in GI and GAL, but they will also consume some capital over the course of the year.

Then to-date, we’re trying break it down very precisely one to the other. From a timing perspective, I mean, one of the drivers of the gains that you’ve seen outside of both EMEA in the first quarter is actually the investment management team trading over for example governments and shifting the asset allocation that towards equity. I think that would probably continue and I think there is no need for us to be in a particular rush when it comes to meaningful of market conditions. So I mean, we certainly haven’t said the team there specific target but they need to be done. Having said that, I would be surprised if we run far into the second half of the year.

Andrew Ritchie – Autonomous Research LLP

And just curious, is re-risking in GI and life?

George Quinn

I think mainly it’s Life, but I will say the Group overall.

Andrew Ritchie – Autonomous Research LLP

Okay. Thank you.

George Quinn

Thank you.

Operator

The next question is from Mr. Paul De’Ath from RBC. Please go head sir.

Paul De’Ath – RBC Capital Markets, LLC

Hi. Good afternoon and couple of questions and firstly just on the restructuring costs. So, obviously there is no huge theme in Q1 and then it’s going to be a large waiting towards Q2. And just wanted to kind of check is that in line with and how you planned and on cost has anything been delayed that we should be aware of in terms of the project timing et cetera?

And then the second point, just a quick question on the potential business because Life has been doing well in the whole pension space, but that’s in line with the new business margin overall in Life and I was just wondering what kind of margin rise in our business because competitor was talking about that rising UK pension to negative margins with the help to build scale and just wondering what are your thoughts on that? Thanks.

George Quinn

Paul, thanks. So I am going to get Vibhu to help me on that because it’s difficult questions. Number one on restructuring, we pretty much expect to be I think the challenge is that, we can’t get the charge until people have been informed and as you’ve seen from payment perspective most of the activity is going to completed in Q2. So, that’s what determined the timing. Vibhu, do you want to take second?

Vibhu Sharma

Yes. Second one on the UK corporate pensions, we are writing it at positive margins obviously the business has margins a bit lower than some of our protection business, which you can see that in new margin quarter-on-quarter, but it is with positive margins. The only thing I will just add growth rate on the restructuring, we did comment at Investor Day that we felt that would occur throughout into Q2, Q3 of 2014. So, from that perspective what we had highlighted back at Investor Day still on track.

Paul De’Ath – RBC Capital Markets, LLC

Okay, great.

Operator

The next question is from Mr. Vinit Malhotra from Goldman Sachs. Please go ahead, sir.

Vinit Malhotra – Goldman Sachs Group Inc.

Hi, good afternoon. Hi, George. Just as an example on the progress being made, we can obviously see the international combined ratio where you’ve pointed out the expenses have improved. Is that a good example you think of what has happened and in terms of your efforts or just one-off there or some luck factor, which you would like to point out? So, just need to understand when we’ve been talking what the progress, is this a good example of the international combined ratio? That’s a first question.

Secondly, on the global corporate, obviously we noticed a slight deep in the momentum of pricing in the quarter given with the growth in NAC has still need to be maintained and profitability looks pretty good even now. So, are there any ideas of concerns here that we should be careful about? Thank you.

George Quinn

Vinit, thank you. So I’ll start and Vibhu will add. So first of all on first one, I mean, you’ll bit surprise if I say that – we certainly filling to a lot. I mean, they can see more booking to improve the profitability in number of areas within IM and you see the benefits of that in Q1. I know something that may contain not only in IM but elsewhere in the portfolio. So, then you see further improvements as I mentioned earlier both on this call in my prepared remarks of course on GI.

On global corporate, I think the overall picture from a selling point perspective is very good and we just moved around that we’ve seen. If you look at the various quarters 4% Q1 a year ago 5% and last year 3% this quarter. I mean, we have seen some pressure for example in the property side you know that’s coming from, generally we could rate it across the global corporate portfolio. There are some areas I think back first question what we would like to may be work on things in global corporate in Europe, is it?

Vinit Malhotra – Goldman Sachs Group Inc.

[What are your] reactions to that.

George Quinn

We’re going have that cost also. So, I mean overall we feel happy with where we are. Of course there is much more we can do and the team have a number of actions in place.

Vibhu Sharma

Yeah. Obviously, in international markets, I think two pieces, if you look at overall international markets we were below 100 which actually reflective of all of regions with general insurance were below 100. Going a little bit deeper on within the international markets, if you look at Latin America as you highlighted we were also below 197.5.

Some of the improvement as we had previously flagged is, we’ve been investing in the business, investing in the infrastructure we’re also now seeing growth in parts of the business. And so, in Q1 we’re seeing the benefits of some of the business that we wrote earning into the quarter which is certainly helping the expense ratio. At the same time, we had last quarter Q1 2013, we did have one-off expensive, which clearly did not re-occur. So, it is the business that we continue focus on growth and also focus on improving the performance and we’ll continue to do so in the quarters ahead.

Vinit Malhotra – Goldman Sachs Group Inc.

All right. Thanks so much.

Operator

The next question is from Mr. [inaudible] from HSBC. Please go ahead, sir.

Unidentified Analyst

Good afternoon. Thank you for taking my question. Just a couple of questions. Firstly, in terms of the FMS margins, could you comment and what do you expect for FMS for the remaining three quarters given it’s been a good Q1? Second on the Life business, in North America Q1 was impacted because of the transfer of the portfolio of 50 odd million, can you just say, what do you expect in terms of profitability for the rest of the year in this segment? And thirdly, could you give us the new money rate on your Life and non-Life side? Thank you.

George Quinn

I’ll start with comment on margins on the Global Life and Vibhu can add and also help with new money rates. So first of all, I mean, we said in the past, that we expect to run at 7% level may be we don’t tend to change that going slightly above. On the Life side, we’ve seen produce something that in 300, 330 range which is I think guidance that we’ve given and indications that we’ve given before and the performance of Global Life.

At the Investor Day back in December, I think we talked about – But I think further more important topic around Global Life is going to be, I mean, what we’re going to do in the back, we’re not ready to talk about the money value yet, but that’s a topic will certainly come back at Q2.

Vibhu Sharma

Regarding the new money yield, I mean, before I get into new money yield, just highlight something. Again, we’ve mentioned when we have been commenting investment income, we have been seeing the investment income declining and I think we’re seeing that maybe 2015 is that inflection point from flattening out period. I guess assuming that the yield environment is where it is today.

Having said that, if you look at that the new money yield as of in Q1 in totality, it was about 214, 215 basis points from a new money yield, a bit down since the end of the year, again reflecting we’ve seen in the overall market with the yields coming and spread tightening a bit.

Operator

The next question is from Mr. Michael Huttner from JP Morgan. Please go ahead, sir.

Michael Huttner – JPMorgan

Fantastic. George welcome and I’m very excited. It’s really, really wonderful and it’s wonderful for us to hear you and Vibhu voice. Thank you. And my question is going to be around double presence sort of would suggest, first thing. And second, interest rate in Germany how far is that cutting 1% to 7% and can you give some numbers on the Farmers growth indicators? You’ve got retention, you promoted new business or something. And on the U.S. Life 95% is still not a great number compared to previous. Can you just talk a little bit about that? Thank you.

George Quinn

Thank you, Michael. It is very flattering welcome for both me and Vibhu. I’ll deal with Framers Group and Vibhu will help me on that interest rate in the U.S. On Framers Group I mean I am not going to give you precise figures today. One of the things that we look at to give a sense of agent retention which is an important driver of the growth, is to look at net promotion. So, that’s a satisfaction levels.

We try that regularly and we have seen that net promotion growth come up in recent periods and we believe that will translate into more agent retention. We’ve seen the benefit already of that in the first quarter and we’ve seen no return to positive growth and even reduction and the erosion of – that’s a trend we’d like to see continue and given the indicators we’re seeing, we expect to continue. Vibhu?

Vibhu Sharma

Yeah, on the comparison, our U.S. business absolutely saw the improvement from year ago. Clearly, it is continued focus on improving the profitability, capturing and growing in the market share. We’ve seen good progress in that business over the past years and we still believe we have more to do.

So that is continued effort that we have underway in North America and one of the things if you call we flagged at Investor Day as we’re seen the shift in the much more focus on analytics and taking to the next generation, it has clearly been a focus in North America and we have a number of efforts underway to enhance our capabilities in that space. Mike, I think you have one question, can you repeat that on to interest rate?

Michael Huttner – JPMorgan

Yes. Interest rate sensitivity, so, 1% to 7% is your roughly number I know you done it probably, but interest rates have come down your sensitivity is in Germany still have back book effect. So, I assume the number would be down and just wonder if you have any kind of feel for that.

Vibhu Sharma

I don’t want to have right now. I’ll get to you some information back. I don’t have that information with me that detail.

Michael Huttner – JPMorgan

But it would be down, wouldn’t it?

Vibhu Sharma

It could probably may be comparable slightly, but let’s get to on that.

Michael Huttner – JPMorgan

Okay. Thank you.

Operator

The next question is from Mr. Andy Broadfield from Barclays Capital. Please go ahead, sir.

Andrew Broadfield – Barclays Capital

Yeah. Hi good afternoon. Two questions please. Just on the product development, you’re making interesting comment about the low information environment having worked way through our results and I just wanted to I guess the flip side to that is if we did see enough thinking anticipation, would that mean that you then start lease process if we capturing, growing kind of inflation into reserving and therefore you’d be chasing? And I guess in the other way, do you now assume more inflation going forward. And second question, as you mentioned re-risking prices on the investment side, is that going to necessarily create quite a little more realized gains over the course of the year as you shift that to government bonds from high-risk assets? Thanks.

George Quinn

Thanks, Andy. So, I mean if we see a return much high inflation. We’re going to see higher claims across the entire industry and now we’re going to have impact on everyone and also some impact on us. I think the comment on the PYD plan which related to try to and maybe point that the inflation is being low for some time that’s why we have some of the benefits that we had at the beginning of the period in assumption of higher inflation rates.

We have benefit at PYD, but of course the most people, the market would adjust to not at current levels, but in expectations of future inflation rate. So, I mean, exact impact on us, if we saw that substantial rise, it depends on full product and which markets reinsurance – but there is no doubt if we saw a substantial rise in inflation. We are going to see higher claims.

On the risking side, I mean just to repeat. I mean, I know you saw the gain that we had in U.S. in first quarter which is triggered by the assets allocation shift. I mean, to the extent we continue, you’ll see that if the interest rates stays roughly where they are. I mean I couldn’t quantify for you today, but it would be reasonable to anticipate given that we did further allocation but you will see from the realized gains from quantity perspective. I can’t really give you exact number.

Andrew Broadfield – Barclays Capital

Thanks. Just to come back on reserving question. I guess there is a variety of market to the degree it was kind of deflection at some point and I guess what I’m hearing from you is your assumptions are coming somewhat to where they were, but they are still above the existing in terms of the inflation assumption. I know you can’t give specific numbers on the table, but implicitly.

George Quinn

Yes. You don’t price inflation level, that will be at current levels.

Andrew Broadfield – Barclays Capital

Okay. Thanks.

Operator

The next question is from Mr. Thomas Seidl from Sanford Bernstein. Please go ahead, sir.

Thomas Seidl – Sanford C. Bernstein

Good afternoon. One question on PNC please. On the pension gains, the expense ratio looks a lot of higher, I think a 120 bips higher. I know there are some one-offs but what is sort of growing rate to expect for the next quarters in the year on this one? And secondly, in Farmers you know that the lots of markets has declined, I wonder to what extend this is driven due to management actions in other words and has been actually implemented to go to the less price into the segment or what is driving this lower loss of market share?

George Quinn

So again, I’ll start and I’ll need some help from Vibhu. On the PNC set of things and you’re right we have a pension gain and there which we should strip out. You’ll see increase in the expense level. There are really two of the things I’d like you to note that, may be doesn’t present the expense ratio and quite as flattening at least. But first of all, we made a reallocation of expenses between GI and GL. So, we reduced the expense level for GL and increased for GI. That won’t be reversing. So, we’ll be stating there could be some allocation change that’s something that team have done, but it does increase the expense ratio.

Second thing is that, now going back to the Investor Day, we flagged the fact that, we intend to make some investments to help produce a further growth that we need in the portfolio and we’re seeing some of that cost went through the expense ratio ahead of what we expect to see and in terms of premium and the margin that will eventually follow. We are making the team to work on the expenses ratio. We would like to improved, ideally that will be growth driven as well as expense and efficiency. We’ll see some benefit coming through from the simplification initiatives that we’ve announced and we talked earlier in the call. I think Vibhu will talk on expense.

Vibhu Sharma

And maybe I’ll just add is, if we just look at Q1 2014 on a standalone basis. I mean the expense ratio is broadly in line with our expectations. So, I think just equating the comment that George made, we are making investments in our party markets to continue our growth. So, that is also reflective in what you see.

Thomas Seidl – Sanford C. Bernstein

So the 28% sort of is a growing concern rate.

Vibhu Sharma

Obviously, I believe it’s broadly in line with our expectations.

Thomas Seidl – Sanford C. Bernstein

And the growth you’re mentioning, because off-course we didn’t see it on our local currency basis in Q1. So, we should expect the benefit from these investments to come in a later quarter?

Vibhu Sharma

You are right.

Thomas Seidl – Sanford C. Bernstein

Okay.

Vibhu Sharma

On farmers, I mean we’ve seen some good metrics on the margins side, an improvement and the entire to the top-line. I mean, Farmers grew due to a number of initiatives driving improvement. So, we are moving to one brand in the U.S. that will drop in 21st century. So, of course that has some impact, and in particular the team are trying to improve the customer experience which comes back to that and made promoters go up, which hope it makes those clients more sticky and helps improve that retention of premium and the retention of agents overtime and really these are the things that drive in the improvement that we started to see in Farmers and we hope it will continue.

Thomas Seidl – Sanford C. Bernstein

And the expense ratio, is it down in Q1?

Vibhu Sharma

In Farmers exchanges or for...

Thomas Seidl – Sanford C. Bernstein

Farmers exchange, yeah.

George Quinn

I think the expenses were broadly in line, broadly comparable.

Thomas Seidl – Sanford C. Bernstein

Broadly comparable. Okay. Thanks a lot.

Operator

The next question is from Stefan Schürmann from Bank Vontobel. Please go ahead, sir.

Stefan Schürmann – Bank Vontobel AG

Hello. I have two questions. The first on basically investing and re-shuffling. So, is there any impact on the duration gap of region at all from this. The second one just on – the combined ratio you saw a nice progressed, an improvement from 86 to 80.4. I mean, would this ratio have been if you basically adjusted for the pension one-off gains. I think my calculation would then be like 91%, 92%, is that right?

George Quinn

So on the first one, I mean the investment shift is intended to alter the overall ALN match. So, there is no intention in today as part of that other duration gap, no close one.

Vibhu Sharma

And Stefan, on your second question, your calculation is above in line.

Stefan Schürmann – Bank Vontobel AG

Okay. Yes. Thank you.

Operator

The next question is from Niccolo Dalla Palma from Exane BNP Paribas. Please go ahead, sir.

Niccolo Palma – Exane BNP Paribas

Yes. Good afternoon everyone. So, my first question is on the $250 million cost savings plan that you announced early March. I’m just curious if you could – if you at this stage have any more detail in the breakdown both geographically and by type of costs of this number?

And my second question is on the German loss ratio, actually that showed a significant improvement year-on-year. Just could you comment on whether there were any special effects last year or this year or whether this is just quarterly volatility or its underlying improvement here we are seeing?

And maybe a last quick comment you could make on volumes in general insurance, because if you compare growth in local currency with rate changes in Q1 for every division, there seems really to be a volume decline across the board. Could you just comment on how much of this is on purpose to address on profitable part of the business and how much of this is driven by in such market conditions? Thank you.

George Quinn

Niccolo, it’s George here. So, I am going to tackle on number. I’ll push down on number three and I’ll get some help from Vibhu and I’ll ask to address number two. And so, on the restructuring, I mean the process is under way. We are fully confident that we will deliver the client 260 million saving. As we are only in the process of communicating with employees shortly, I want to avoid to give breakdown today. I mean, at Q2 you can have a chance to invest at what are different components are going to be.

On volumes in GL, I mean some part of the GL business have got tough comparison. I mean we have some fronting business in the Group before and I think if we take that you got much better comparison, but we’re still broadly flat. Vibhu?

Vibhu Sharma

Yeah. So German loss ratio is, we’ve been working on improving that business we’ve seen good improvements. We actually saw a lot of those improvements last year. However, last year we were impacted by a couple of large losses as well as some other weather activity that occurred in Germany. Obviously, those events have not or did not or will not – hopefully did not occur in Q1. Or I should say differently, did not occur in Q1 and so this is more reflective of the underlying performance of that business and we are certainly pleased to see that improvement.

Niccolo Palma – Exane BNP Paribas

And may be just a quick follow-up. So, if I understand correctly in terms volumes in GI, you are saying that, there were broadly flat year on year once adjusting from the fronting contracts and all that special effects, right?

George Quinn

Yeah. If you actually take the one fronting, it’s sort of being slightly up 1% on a top-line perspective. If you look at that, we also flagged in our disclosures within global corporate. There is some timing effects that we see so come through in Q2, which will bring us I think back to a bit of a growth trajectory as we look forward towards the year.

Niccolo Palma – Exane BNP Paribas

Right, great. Thank you.

Operator

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

Marcus Rivaldi – Morgan Stanley

Good afternoon everybody. And I have quick follow-up, hopefully a question on the German cost reallocation. Could you just give me more color, what’s going on in that please? And then just secondly in non-core. I know it can be very lumpy to reporting in that segment, but a bit more color about what was going on there and how sort of these sort of size of cap to really for liability strip to balance sheet from that transaction? Thank you.

George Quinn

So Illinois take first one and again Vibhu will help on number two. On the German cost allocation, we’ve made a change in the allocation of expenses between GL and GI. It benefits GL that because GL but because GL off course has a policy interest, part of the benefit flows to the policy holder. So, you don’t see the so positive impact will offset the negative impact the GI has suffered. We now that’s something that we are looking at for some time then we came to a conclusion this quarter that we had to take action to make the adjustment. On no-core?

Vibhu Sharma

Yeah, just one second please. So, on specifically on non-core, as we are continue to look at different portfolios, there was a roughly about $25 million loss and one had a relatively small impact and it’s a non-recurring item. So, it’s a significant impact on the capital release.

Marcus Rivaldi – Morgan Stanley

Okay. Thank you.

Operator

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

Ralph Hebgen – KBW

Yes. Hello, good afternoon. Ralph Hebgen from KBW. Three things. One may I return to the expense ratio on PNC. You mentioned that, there was a transfer of expenses between two segments, Life and GI. It would be interesting if you could perhaps comment on why that transfer occurred? Was there a shift of businesses where the domicile where you located them between the Life and PNC segments for example?

And the second one is, as the expense ratio was increased as a consequence of that transfer in PNC, you would think that the Life business operating profit were supported to some extent from this transfer as well. Would you be able to quantify how much that was?

And number three goes back to re-risking and the fact that you mentioned that the ECR service ratio is going to gravitate back to the level 120% overtime, do you have a feel of how much uplift to the running return on assets you would generate by re-risking the investment assets? That’s three questions. Thank you very much.

George Quinn

So Ralph on the first piece, again I’ll take help from Vibhu. The expense ratio and what drive that, there is not shift of business. The reallocation between the Life and General Insurance business. I mean, the trigger for this is obviously reviewing and make ensure that the policy holders are actually being charged appropriately. So, what takes place is GI absorbs more costs, GL absorbs less. Part of GI goes to policyholders. Vibhu, do you know the...

Vibhu Sharma

Yes. So on the GI perspective it has impacted increase in the expense ratio roughly 30 basis points which if you equate, it is roughly about $21 million. On the Life side, after policyholders sharing the net benefit to Global Life in Germany was a favorable 11.

George Quinn

On the last point, the benefit of the adding some additional risk to the asset portfolio, I mean, we’re seeing some benefit already from what we got in Q1. So, I mean some of the steps that team has taken will at least partially offset the continued lower interest rate. As far as the projection for the future, I’m not able to do that today. But where we are further in the program where you have the end and say I will get guidance around and so what you can expect to that and the impact on the running yield.

Ralph Hebgen – KBW

Okay. Thank you very much indeed.

Operator

(Operator Instructions). The next question is a follow-up question from Mr. Andrew Broadfield from Barclays. Please go ahead, sir.

Andrew Broadfield – Barclays Capital, Research Division

Thank you for taking my third question. It’s a very quick one. I noticed your cash balance for the quarter end I think is at the highest that’s been for five years. Is that related to sort of the usual sort of random balance sheet date as part of your investment transition?

George Quinn

The random balance sheet data immediately follows the dividend payment. So, I’ll proceed with dividend payment.

Andrew Broadfield – Barclays Capital

Got you. Okay. Thanks very much.

Operator

The next question is from Mr. [inaudible]. Please go ahead, sir.

Unidentified Analyst

Yes. Good afternoon. Just on these realized capital gains. I saw that most of the gains came from equities and debts and I was a little bit surprised see this $331 million included in both. So, now I can see that 136 in Global Life, 129 in non-corp business. And I always I thought that we have sustainable profits. Can you give me a little bit feeling of going forward how you split realized capital gains between the BOP and BOP to net profit bridge? So, that’s my first question.

And the second question is just on how we should model the combined ratio, the non-technical cost benefited from positive currency translation gains of roughly $70 million. And so, the one of the pension gain. I guess last year that net non-technical should be of $250 million per quarter. Now you mentioned in the retail that, you will include some $600 million or 2 percentage point of the combined ratio in the underlying result. So, is it fair to assume that another $400 million will remain on the net non-technical cost line?

And then just three here gain in the call mentioned losses of $125 million in Q2 that should bring total year-to-date losses to $150 million roughly, 12% of the Farmers combined ratio. Looking at trend of all three years at top-line of 5%, net cat load in the Farmers combined ratio. So my questions is just separate ratios are now at 37.8% and how should we expect a further reduction in the quarter agreement with the Farmers exchanges? Thank you.

George Quinn

So for this I’ll ask Vibhu to tackle number one and number three. I’ll take number two. Do you want to start Vibhu?

Vibhu Sharma

Yeah. Let me start with the Farmers questions first. On the Farmers question, we did seek improvement in the surplus exchanges in Q4, we did see a further improvement in the surplus in Q1, which is obviously positive than in the business and in the exchanges. As we look historically, we have seen that Q2 and Q3 have been a bit heavier on net cat events specifically Tornado that have hit the U.S. play.

Clearly, if we come through or the exchanges come through in Q2, Q3, it is something that exchanges and the Board of Governors at exchanges will look at as far as the quarter share support that exist. It is certainly the desire and that we communicate at Investor Day for that quarter share to decline, a percentage to decline over time. So, let’s see what comes up to the next two quarters.

On your first question relating to the realized gains and losses and what is included within in BOP and what is included outside of BOP. Specifically, what’s in BOP are situation where we are in a way hedging some of the liabilities. And so while we may see a movement on the asset side and you are seeing it coming through one line, we have sort of almost equal and opposite impact on the liability side.

So from a net BOP, it’s very minimal impact. So, therefore what I would encourage you to look at from a what shows up from a realized gains is the part that George has talked about in responding to some of the earlier questions, which is from the re-risking actions that occurred in the first quarter and the number that’s sits outside of BOP is approximately $325 million from those events. George?

George Quinn

On the molding of combined ratio, so I mean because of the one-offs that we’ve seen in Q1 for the pension adjustments, clearly a one-off, so that that benefit will disappear in Q2. FX, I mean FX is smaller with MGI and I think one of the points I wanted to highlight on the FX side, I mean, we have a reasonably substantial FX benefit across the entire business, clearly in Life and GI to deviate for a second.

I think it often don’t get credit. So, this wasn’t a result of risk taking, but it was a result of the team clearly some of the run in America territories using assets to back local currency liabilities. So, some of the negative PYD that we saw last year was a result of inflation would have been partly offset by this devaluation we’ve seen more recently. Now, that is particularly real than to estimating combined ratio going forward.

On U.S. growth, I think U.S. growth rate is right non-tech. Just to highlight the piece that remains, obviously there is a large amount of interest cost and that doesn’t outflow for the combined ratio under any circumstances.

Vibhu Sharma

Well, I just want to add is to just make that shift that we have talked about in fact that we would see at the half year has no impact, it’s just a classification from non-tech to tech.

Unidentified Analyst

Yeah. That’s clear. Okay. Thank you very much.

Operator

The next question is a follow-up question from Mr. Thomas Seidl from Sanford Bernstein. Please go ahead, sir.

Thomas Seidl – Sanford C. Bernstein & Co., LLC

Thanks. Just a quick on the Life. Latin America, on non-life also, it is a fair observation, that growth have come down and what is driving this? I mean we don’t see the growth that we used to see and we see from other players in Latin America?

George Quinn

Yeah, so, let me just start and I’ll use the Zurich Santander as an example because that is really a broad business that we have in there. So, if I just look at for example, Zurich Santander on a local currency basis, it’s done quite well. So for example, local statutory profit before tax is up 16% in the quarter on a local currency basis. Obviously, down 4 when you put it in from a dollar prospective. The volumes of both our unit link and protection business increased and overall ATE was up 15% in local currency.

So again, when we look at that even if I take specifically Brazil, our overall GWP and deposits grew by 6% again in local currency. So, it is a lot being impacted from the currency translation into the U.S. dollar.

Thomas Seidl – Sanford C. Bernstein & Co., LLC

Okay. Thanks.

Operator

We have another follow-up question from Mr. Michael Huttner from JPMorgan. Please go ahead, sir.

Michael Huttner – JPMorgan

Just on the excellent combined ratio in Europe particularly in Germany. I mean, any other one-off that we should think about? I know would have pensions or reserve leases or anything, actually in the UK I am assuming – would be about 5%, any indications would be very helpful.

George Quinn

So I think it slightly was the pension gain, that’s it.

Michael Huttner – JPMorgan

And that’s mainly Germany, right?

George Quinn

That’s mainly Switzerland.

Michael Huttner – JPMorgan

Switzerland, okay. Thank you.

Operator

We have another follow-up question from Mr. Vinit Malhotra from Goldman Sachs. Please go ahead, sir.

Vinit Malhotra – Goldman Sachs

All right. Thanks for taking the questions from me. On the deployment of the capital and additional capital rate in the business. Your asset side has been mentioned. Yesterday, we heard enhancing investment returns to specific initiatives was announced and I think I remember there was indication about getting into more lending or such kind of thing. Is that the intention to or is there some other kind of assets re-risking that you are thinking about? Thank you.

George Quinn

There is no change to the climate. We have invested in – I mean what we have made is given the capital situation, we’re looking where it makes sense to make further adjustments to the asset allocation. I mean, overall, we don’t intend to change the relatively conservative stands that we have adopted. Certainly, we will execute plan that we have announced in December and may also other shift in those allocation.

Vinit Malhotra – Goldman Sachs

Okay. And so, than it’s safe to assume that this 127 to 120 it’s not mainly assets, there are lots of things, is that you said earlier?

George Quinn

Well, I think early in the call, I tried to avoid – and I couldn’t do it reliably for you today.

Vinit Malhotra – Goldman Sachs

Okay. Fair enough. Thank you very much, George.

Operator

Gentlemen that was the last question for today. Would you like to conclude the conference?

George Quinn

Yes, please. I thought he invited you and you are going to conclude the conference. So, my thanks to everyone. My thanks particular to Vibhu to help me in my first analyst call and I’m looking forward to meeting all of you over the next weeks and months. Thank you for taking the time today.

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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Source: Zurich Insurance (ZURVY) Q1 2014 Results - Earnings Call Transcript
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