Zurich Insurance Group's (ZFSVF) CEO Martin Senn on Q2 2014 Results - Earnings Call Transcript

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Zurich Insurance Group (OTCQX:ZFSVF) Q2 2014 Earnings Conference Call August 7, 2014 12:45 PM ET

Executives

James Quin – IR

Martin Senn – CEO

George Quinn – CFO

Analysts

Paul De'Ath – RBC

Andrew Ritchie – Autonomous

Vinit Malhotra – Goldman Sachs

Farooq Hanif – Citi

Atanasio Pantarrotas – Kepler Cheuvreux

Michael Huttner – JPMorgan

Daniel Bischof – Helvea

Niccolo Dalla Palma – Exane BNP Paribas

Andy Broadfield – Barclays

Stefan Schuermann – Bank Vontobel

Thomas Seidl – Sanford Bernstein

Marcus Rivaldi – Morgan Stanley

Peter Eliot – Berenberg

Andrew Ritchie – Autonomous

Thomas Seidl – Sanford Bernstein

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to the Zurich Insurance Group half-year results 2014 analyst and media conference call. I'm Stefanie, the Chorus Call operator. 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

Thank you, and welcome to Zurich Insurance Group's results presentation for the second quarter of 2014. I'm joined by our CEO, Martin Senn, and our CFO, George Quinn. Martin and George will make a few short comments before we open the Q&A. As usual, please keep to two questions.

I will now hand over to Martin.

Martin Senn

Thank you, James, and welcome to everyone on the call also on my behalf. And let me make a few introductory comments. As you have seen from the results we published this morning that we have made a good start to 2014. Business operating profit of $2.6 billion for the first six months is 15% higher than in the prior period. And the BOP of $1.2 billion for the quarter is 32% above the period last year. And we are also on track against each of our three key targets.

We have also made good progress in terms of executing what we said at the investor day. We have largely completed the streamlining of the Group above the business unit level, have taken actions in a number of our turnaround or exit operations, and we have completed much of the preparation for future investment in priority markets.

That said, this is just the start, and there is a lot we still need to do to achieve the three key targets we set out for 2014 to 2016 particularly with respect to improving our business operating profit after tax return on equity.

In terms of next steps, we plan to provide a half day investor update on December 5. We're going to do that in London and we gave a full investor day update on May 21. That's going to be then on May 21, obviously, 2015, that's going to be then in Zurich.

And with that, I now hand over to George. Thank you very much.

George Quinn

Thanks, Martin and good afternoon or good morning to everyone on the phone. I'll make a few short introductory remarks on the results. First, in general insurance, we've reported a good combined ratio of 95.7% for the second quarter. Just a reminder, this is on the new basis, including expenses that were previously shown within the non-technical results. On the old basis, the combined ratio would have been 93.1% for the second quarter.

We're particularly pleased with the accident year ex-cat combined ratio, which was 3 points better than in Q1 and 4 points better than in Q2 2013. If you look more broadly at the first half of 2014 and compare it to the first half of last year. We see good improvement in the large loss experience as well as a roughly 1.5 percentage point improvement in the underlying loss ratio.

As you've seen from the presentation, the level of rate increases that we've achieved in Q2 has slowed compared to what you've seen in prior quarters and I think that's consistent with what you've heard from the rest of the market. In addition, as you've also heard from peers, this is the consequence of the fact that most of our business is priced at levels that we would regard as adequate.

Nonetheless, irrespective of this trend, we need to continue to improve accident year profitability and there a number of ways in which we intend to do that. Specifically, we continue to achieve rate increases in those classes of businesses where we're not compensated for the risk that we run, and we're starting to see better results in some of the turnaround businesses where we need to improve our own performance.

In relation to the life business, we've had a solid start to the year. The main change you'll see in the results is the introduction of source of earnings reporting. We've also published an in-depth briefing document which explains the numbers and the trends, and hopefully this will have addressed some of, perhaps, your more detailed questions.

In farmers, we've seen another quarter of encouraging development in the top line. Although GWP was still down around 1% overall, we saw growth in our core business in terms of both premiums and policies in force. We're also showing you additional metrics around NPS, numbers of agents, new business and retention, and I'm pleased to say that these are all pointing in the right direction.

We've also given you a forecast for expected full-year cash remittances that we expect to be in excess of $3.5 billion. We're also pleased with this number, but it does include some one-offs, so it's important that you don't extrapolate it over the entire plan cycle. We've also updated the free cash flow generation analysis that we first showed at the investor day. This confirms what we said back in December and once again proves that we're a very cash generative business.

To summarize, as you've heard from Martin, we see this as a good set of results with encouraging progress across the group. Having said this, we all recognize that there is a lot more to do and this will be our focus for the next 30 months. The targets are our top priority.

We expect to make investments to support future growth, but at the same time we won't hesitate to take capital from businesses that cannot meet our expectations. Finally, we intend to take full advantage of our operating leverage to grow operating earnings.

With that, I now look forward to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). First question from Paul De'Ath from RBC. Please go ahead, sir.

Paul De'Ath – RBC

A couple of questions, please. Firstly, on the $3.5 billion cash guidance for 2014, you obviously mentioned that there are some one-offs in that. Is there any chance you can give us any idea of the quantum of those one-offs? And I guess is it fair to assume from your comments that the three year cumulative total is more likely to be closer to $9 billion than a $3.5 billion annual would imply? That's question one.

Question two, just on these new common customers between global corporate and corporate life and pensions over 2014, how many new common customers have you signed up so far? You say you're making good progress, so is that roughly half of the 100? And just on that, what's the mix of the customers? Is this mainly adding life customers to existing non-life relationships, or the other way round? Or are these new, new customers that you're adding? Thanks.

George Quinn

On the first one, yes, I want to avoid trying to set expectations for three years beyond what we've given at the investor day in December. I think on the figures you've heard today, the $3.5 billion, we've got a small amount of one-offs. We see a run rate underlying, though, that is higher that we would have anticipated given the $9 billion guidance for the three years. So there is some of the excess that we've seen this year is additional cash that we've extracted that we would hope to repeat, but some of it's clearly one-off. But I'm not going to give you precise detail on the one-off elements because it's a forecast for the year.

I think on the other comment, would it be closer to $9 billion rather than the implied $10.5 billion, given what we said and the one-offs, I think you have to assume that it will be closer to $9 billion rather than $10.5 billion.

On the customers for global corporate and CLP, the cross sell, we're about 70, and I guess we're mainly adding life to existing global corporate relationships, rather than bringing in new relationships.

Operator

Next question from Mr. Andrew Ritchie, Autonomous. Please go ahead, sir.

Andrew Ritchie – Autonomous

Two questions. First of all, thanks for the new disclosure on which are the priority and non-priority markets in non-life, but just on that, do you think you can still improve the active year performance in the priority markets? Clearly there is less tailwind from rates. I know that you're seeking to improve performance in the non-priority or managed for value businesses. But in the priority markets, I'm thinking specifically U.S. particularly, do you think you can improve that, given the rate environment? And maybe within that, I know there were some specific initiatives in U.S. commercial on workers' comp and commercial auto. I don't know if you've got any updates on that, would be helpful.

And second question, on farmers, there is useful slide on new business policy count growth. How do we translate that into when that would move into overall positive PIF growth at farmers? I'm thinking sequential positive PIF growth. Thanks.

Martin Senn

I will take the Richard, the first question and then hand over to George. Sorry, it was Andrew. Now, with regards to the competitive environment. I think we’ve the right strategy in place and we’re executing it by duly investing in our priority markets where we think we have distinctive positions. And if we take the half year comparison, last year versus this year, we were able to grow in our priority markets by 3% in local currencies, so that's pretty encouraging.

If I break that down to the segments, thinking of global corporate, we have here definitely a clear competitive advantage through our risk insight, though risk engineering approach. I think that's a relatively high entry barrier relative to at least many of our competitors in the space, the superior claim service and also our well-established relationship model.

Then Paul asked a question before, asking about new customer achievements. I was in Mexico about two and a half months ago, and at the time we had three global corporate customers, Mexican-based companies. The folks down there told me in three years, we're going to have 30. I said, well put your hand on your heart, is it 30 and they said yes, today we’ve 12.

The point I want to make here really is that the world keeps interconnecting and globalizing, and there is more customers in new markets going global. They cannot rely any more on the local carrier. That's where we also have definitely a good advantage in that segment. So back to your question, where is the confidence for us to be able to continue growing, even though the market becomes more competitive.

And just a last example is North America commercial. We're executing on our strategic growth initiatives. We make investments in data analytics. Many of you already have seen about two years ago, when we brought some of the investors and analysts to the U.S., where we were there. We have made significant progress again on the back of our analytical capabilities, and particularly where we have profound strength in some of the fields construction, technology, healthcare. Keep in mind we are the number one writer of construction risk in the U.S., number three writer of surety. That's a very strong base to start working on. And we continue having the confidence, even in more competitive environments, for us to be able to grow in those segments and customer areas profitably.

George Quinn

Then, if I take the second question on farmers, I guess you heard on the video we're still down in the quarter on the policy count. But I guess if we focus in on the piece that we would regard as more core, so excluding the non-exclusive or the independent agents, business insurance and standard auto, we've seen a rise of some 25,000.

I think actually, Andrew, if you look at the report card that was in Martin's presentation, I think that actually gives you a better sense of where things are headed, because you have a longer history on that page. And I think those metrics are in many ways just as important as the policy count. Obviously, we look at farmers month to month.

The trends we see are still improving, but we have to punch through that zero line. You've seen a sequential improvement, 4% down Q4 last year, 2% Q1, 1% in Q2. We cannot be very far away from the point at which we see some positive growth in farmers. I'm trying to resist the temptation to make a forecast.

Andrew Ritchie – Autonomous

Just my first question wasn't actually on growth. It was on the margin in priority markets in non-life, the accident year margin. I guess I know you were trying to focus on improving the accident year in the turnaround businesses, but I just want to know if you think you can improve it in the priority markets.

George Quinn

Maybe I can add. I think some of the things that Martin pointed to around the investments we made in technology are not simply about growth. It was about trying to be -- use our customer segmentation to target parts of the market that we believe are actually more profitable for us, to try and manage the broker relationships in a way that we see more of the business that we think would be in our sweet spot. I think Martin's comments may be focused on growth, but I think it's equally valid for the bottom line as well.

Operator

Next question from Vinit Malhotra, Goldman Sachs. Please go ahead, sir.

Vinit Malhotra – Goldman Sachs

My first question was actually on the analytics bit, but I think it's been addressed fairly comprehensively so I'll just move to the second topic. In the video, there is also a comment on evaluating options in global life, whereas my understanding from the investor day was that it's more internal oriented. But is this new comment designed to communicate that there are other options as well or is it more to say that there is more of internal measures that you are still thinking?

And just to confirm, I will use my second chance here, just to confirm that all this analytics investment, does it also give you a portfolio mix control which should offset some of the pricing pressure? Just if you could reconfirm that, it would be very kind. Thank you.

Martin Senn

I'll start on the question with regard to the more structural options on global life. Now, we’re still in the process, of course, of looking at all options one has. That is not limited to the usual options, but when we say structural, that means also potential disposal of businesses or portfolios. It would include reinsurance, securitization and any other capital action. You really refer to the capital side of the equation.

But let me also stress there is a reason why these are three-year targets, i.e. one needs to take time in doing that. We are not in need of raising capital. We’re clearly not under any pressure to pursue any of these actions at any price, and we want to do that in a very balanced economic, sensible way, and that is the approach we are taking here.

Maybe, George, do you want to add to that or?

George Quinn

No, that's a complete answer. Maybe I'll take the analytics. I'll start with that. So, on the analytics side of it, Vinit, I think there is a portfolio mix element to it, but I guess we're more focused on the customer side of it. So we're looking for those parts of the customer map where we think our offering is most attractive and where we can generate the highest return. So there is a portfolio mix element to it.

Operator

Next question from Farooq Hanif from Citi. Please go ahead, sir.

Farooq Hanif – Citi

My first question is on the ZECM. You've commented that you're going to come back closer towards the 120%, because of your reinvestment in riskier assets. I was wondering, you still have a margin, what are your other priorities for using that excess risk capital and where would you ideally like that to be? That's question one.

And question two was just you gave -- you're talking about improving underlying accident year, but on the 1.5% of underlying loss improvement that you've achieved in these results, how much of that is just a decent quarter because of the large loss experience? How much of that can we start extrapolating? Thank you.

Martin Senn

Start with the first question. Now, the ZECM, how we look at our capital base is obviously that is our ambition to have a AA rating and that translates back into the 100% range and the economic capital models that you all do know, they can be very volatile and very volatile from quarter to quarter, and that's the reason why we deal with this range. We consider the excess capital to be indicated by the ratio. Well in excess of this range, for an extended period of time. And while the ratio has now been above that target for the last few quarters, it is also to be recognized that has been mainly due to model changes.

Now, with the additional risk taking throughout the first half, in Q1 we have reported there was an impact on ZECM of 4 points. With the action and the deployment of capital into investment management in the second quarter, we expect a further reduction of that of 3 to 5 points. This is still bringing the ZECM then slightly above the top of the current target range.

What is very important to stress again here is that in terms of our priorities for capital deployment, first comes the dividend, second the growth of the business, and then third, if we cannot use the capital in the business then obviously we will have to find sensible ways to return this capital to shareholders in a very effective manner. And that's how we do look at ZECM. I'm sure later on there might be a question in terms of what specific risks we have taken, but I'll leave that for the time being.

George Quinn

On the second point, on the improving underlying accident year loss ratio, again, to look back at maybe half on half to try and get a more stable view of what's taking place. Our view is that of the total improvement that we see, we would estimate and it is an estimate because it's not a precise mathematical science, we have about 1 percentage point improvement from good luck on large losses and we see the remaining 1.5% is the actual underlying rate improvement.

Depending on how bullish you are, you can extrapolate it straight away or you can give it another quarter or two to see further evidence if it sticks. But we’ve no reason to believe that the 1.5% is not a sustainable improvement.

Operator

Next question from Atanasio Pantarrotas from Kepler Cheuvreux. Please go ahead, sir.

Atanasio Pantarrotas – Kepler Cheuvreux

First of all, thank you also to provide more visibility on your life business with new data. I have two questions. First one is on GI investments. You just mentioned that you would like to take some more risk on the investment side, if you can provide some more color on this, or these new investments in liquidity instruments. And what could be the impact on G&I running in the next couple of years?

The second question, on your German life business, I remember there was some options in place to apportion, to defend the portfolio by low interest rates environment. I would like to know if you can provide some color on what could be the evolution on this part of portfolio, if it is a totally closed devaluation [ph] by the business, totally closed to new contracts? And what could be the evolution in the next future, provided that interest rates will remain as low as they are? Thank you.

Martin Senn

Let me start with the first question, the investment action we have taken to date. I should mention here as well that we have finalized in Q2 the deployment of additional risk capital into investment. What we specifically have done is to increase the asset allocation by about $2.5 billion in equities. That brings the current exposure in equity to 4.8% from before that 3.8%, so it's about a 1 percentage move. In absolute numbers, at current FX rates, it's from $8.2 billion to $10.5 billion equity composition. The other major initiative on risk deployment was an increase in our credit exposure from 40%, i.e. $85 billion, to 41%, i.e. $90 billion. That's also been completed at the end of Q2.

The impact on that with regard to business operating profits means -- you've got to understand there are obviously some moving parts to that, given market movements. It's the timing of it. There are some tactical considerations against that. But if we take these limiting factors in the analysis into consideration, we should expect an additional $60 million to $75 million of net investment income coming through this year. This is before policyholder allocation.

Atanasio Pantarrotas – Kepler Cheuvreux

This is on a consolidated basis?

Martin Senn

Yes.

Atanasio Pantarrotas – Kepler Cheuvreux

So life and GI? Okay.

Martin Senn

That's correct, yes.

George Quinn

So, on your second question, on German life, we had some receiver swaptions in place that we no longer have. These have all now been sold, so we no longer have receiver swaptions in place to provide us with additional protection on interest rates.

Operator

Next question is from Michael Huttner, JPMorgan. Please go ahead, sir.

Michael Huttner – JPMorgan

So on the $3.5 billion, how much -- you sound very certain, but we're not at the year-end obviously. How much of that have you already received or have your subsidiaries already said they will do? How much of that is actually certain already? And then the other question is on the combined ratio. I noticed that there is $40 million of expenses in other operating business which might normally belong to GI and I just wondered what was the impact in your 1.5% underlying improvement. I'm sure you reflected that, but just to confirm. And then it sounds as if now reserve releases are completely out of the picture. The zero number is the new normal. Thank you.

George Quinn

So, Michael, I think I'm going to have a go at these and Martin can -- so how certain are we on the $3.5 billion, how much have we had already, I think you can hear from the confidence in our voice that we've had a very large proportion of the $3.5 billion already and you would expect that given the way that dividends flow. So these things are going to be typically frontend loaded.

But I think it's more important to focus on what we're going to generate for the full year. So we're giving this guidance, more than $3.5 billion. We’re highly confident, but of course things can change, but we've got a very large proportion of the cash already.

On the improvement, well spotted, you're right. We have this flip between OOB and both -- in fact all three of the segments in the quarter. For GI, the 1.5 point improvement that I talked about earlier is a loss ratio improvement, so of course that expense impact has no impact on that number.

And then your last question, was it PYD, Michael?

Michael Huttner – JPMorgan

Yes, please.

George Quinn

Obviously, we've given guidance of 1% to 2%, you see zero in the quarter, so does it have an impact on us? Well, I guess we're trying not to be complacent. We've looked extremely carefully at what drives it. We can pick out a number of very large, including one extremely late reported claim which is significant for us. And of course, if I exclude those, you'll find we're in our 1% to 2% range.

And I guess the key question is do we see things in those losses that would give us concerns that these would be something that would continue over significant periods, and we conclude that while there is always the risk of further development, we don't see these being systemic issues into future quarters. So we're confident in the 1% to 2%.

Operator

Next question from Daniel Bischof from Helvea. Please go ahead, sir.

Daniel Bischof – Helvea

Most of my questions have already been answered. So, just quickly, could you update us on how large the gap was between the new money yield and the running yield at the end of Q2? Thank you.

George Quinn

Daniel, it's about 1%.

Daniel Bischof – Helvea

Thanks.

Operator

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

Niccolo Dalla Palma – Exane BNP Paribas

Two questions from my side. First one, on the cost savings, the $250 million, could you perhaps give us any indication of how it will break down by division and how much you expect to be reinvested? And secondly, if I may come back to a comment you made at the December investor day on the 12% to 14% operating ROE target, you said you would be disappointed if you only achieved the lower end of this range at the end of the period. So I just wanted to hear about whether you're confident that the high end is in reach, without making strong assumptions on the macro side. Thank you.

George Quinn

So, if I take the first one, I think Martin will take the second. On the cost savings, to highlight something I mentioned in the video already, it will mainly fall to the divisions because it will impact the recharges that are made. I don't have the precise split yet of where it's all going to fall, so I can't give you very precise guidance. But given that GI's the largest business, I expect more of it to fall there but I guess in due course we'll give you more clarify on where that's going to fall. I think you had a second point on the cost saving which I've forgotten, Niccolo.

Niccolo Dalla Palma – Exane BNP Paribas

It was how much could be reinvested in growth, if you have any view on that yet.

George Quinn

I think it depends on the opportunities we see. If we're seeing very attractive opportunities to deploy capital that requires expense support, then we're absolutely going to do it. So it depends on what Mike, Kristof, Jeff and the rest of the team bring to us. We would be prepared to reinvest all of it if the economics make sense. But we'll see in the future as opportunities emerge.

Niccolo Dalla Palma – Exane BNP Paribas

Okay.

Martin Senn

On the first part, Niccolo, the point we made at investor day, that's still valid, definitely so. And with the BOPAT ROE number we have shown now of 12.5%, that shows and indicates that we are in our target range. But we also made the point that, George and I, that this is a good start but there is still much more to do, and the key component is to put through action to keep moving this business operating profit after return on equity -- after tax return on equity upwards. And that's the core of our strategic initiatives.

Operator

Next question from Andy Broadfield from Barclays. Please go ahead, sir.

Andy Broadfield – Barclays

Just one quick question on the capital management side of things. As we look at the -- you've talked a little bit cryptically about the ECM model being at 128% and that you want to maintain some buffer because of volatility. But I guess the question that will increasingly emerge is will you consider other actions to maintain that or to keep that to the range of the 100% to 120%, such as buybacks or are we just nowhere near thinking about that sort of thing at this stage?

George Quinn

Apologies, Andy, if we were cryptic. I think just to repeat what Martin said on priorities, number one, dividends; number two, business growth where it meets the hurdle requirements that we have. And then number three, if we have excess that we can deploy and just to repeat, we'll look for the most efficient way to return it to shareholders. I think in times of timing, we're not ready today to give guidance on when that's going to be. I think it's a bit like Niccolo's question on the expenses. We want to see what the businesses have as possible growth options. Some of those will extend more than one year ahead of us. Once we've had a chance to evaluate them, then we can make a decision about what the best deployment of the excess capital is going to be. But we can't answer that question today.

Andy Broadfield

But do you have a numerical framework that we should be thinking about, accepting that you might use 8 percentage points for some transaction? But sitting above 120%, is that generally a level that you're prepared to sit at for some time or will you get tired of that pretty quickly and want to bring it back down to the 120% region?

George Quinn

The target range is 100% to 120%. So, ordinarily, we'd look to operate around the middle of that range. It partly depends on what our outlook is and I think if we think we're in uncertain times, we'll let the thing rise to the top end of the range. I guess if we're more bullish and we have more growth opportunities, we'd let it shrink slightly or fall slightly to the lower end of the range. But we want to be in that range.

Operator

Next question from Stefan Schuermann, Bank Vontobel. Please go ahead, sir.

Stefan Schuermann – Bank Vontobel

Just two questions, the first, on non-life, I saw that your retention was increasing to, I think, roughly 86%. Is that a trend that will go on? And can you maybe more specifically say if that is special lines of business or across the board? And the second one is on duration gap. Can you give me some update here on the duration gap in life and non-life in the view of your investment rebalancing if there is any change here?

George Quinn

Stefan, I'm going to take the first question on retention. You may have to repeat the second question, because we were just debating what the first question really meant while you were speaking on the second part. On the first one, we don't really see a significant change in retention for non-life. There is certainly a change in retention for farmers. That's certainly improved and that's a positive sign for the future. But across GI, I don't think we see significant deviation.

Stefan Schuermann – Bank Vontobel

Okay.

George Quinn

So can I ask you to repeat the second question? Sorry.

Stefan Schuermann – Bank Vontobel

Yes, the second question is just on the duration gap, if there is any change here in the life and non-life segments from your investment rebalancing.

Martin Senn

No, there isn't, actually, same durations. As you know, as a principle, we try obviously to match durations, and if anything they have slightly lengthened. But very much unchanged, weighted I think at 5.9, 3.5 on general insurance and somewhere around -- give you the exact numbers we can deliver, but somewhere around 7, 7.5 for life.

Stefan Schuermann – Bank Vontobel

Okay. So no change here.

Martin Senn

Yes, no change.

Operator

Next question from Thomas Seidl from Sanford Bernstein. Please go ahead, sir.

Thomas Seidl – Sanford Bernstein

First question, on the P&C expense ratio, it seems a bit higher than expected, and given the typically lower expense ratio in the second quarter, I wonder what the mid-range run rate is on this new basis expense ratio that you're disclosing. Should we hence expect it to be higher than the 29.7% shown today? And secondly, on the investor day I think I remember you told us that farmers, one of the strategies they have is they want to grow the confident planner segment, and I wonder if you can give us an update what actions have been done and what the success has been on those actions to date.

George Quinn

Thomas, on the first one, I'd point you to the comments on the video. So, 50 basis points we think is the one-off benefit that we have. So if you adjust for that, that'll give you a sense of, all things being equal, where it would go. I'd also point to what I discussed earlier with Niccolo, that we've opened the possibility that we are prepared to let it rise if we think that's a smart investment for the future. But certainly the -- on a running basis, the 50 basis points is the best guide that we can give you. I apologize. Can you repeat the farmers question again?

Thomas Seidl – Sanford Bernstein

The farmers was just going back to the investor day, where I think you told us that the strategy to turn around the growth was you want to grow not in the price sensitive segment but in the confident planner segment. I wonder what actions farmers has really taken year to date and what the impact was of those actions. So in other words, do we see impact from this strategy?

Martin Senn

Yes, definitely we do see impact. Naturally, the initial action we took was a repricing on the more price sensitive segments, which are a very cost conscious representation of the customers which we are pricing out. That's part of the decline in GWP we have seen last year. Along that side as well, somewhat an improvement in the combined ratio. We continue pushing that, particularly with the confident planner segment.

Keep in mind this is 17% of all U.S. households we are focusing on. We have some good early indication in terms of the receptiveness of this prioritization through the agency channel. On the back of that, also convincing is that we keep growing agents, that's why we're mentioning this time there is a -- somewhere a correlation to that, that this is a segment which needs high maintenance, and that was in line.

There has been some investments which start coming through with regard to the billing procedures and the way the customers do receive then the respective statements. You get one statement no matter what policy you buy as a retail customer. That has been a very important part of improving the service to the customer. There has also been a renewal on the web and particularly as well on the web accessible for specific customers only through password protection.

There is a series of action which is starting to flow through, but it's definitely supporting the targeting and the validation of farmers' consumer strategy to the segment of confident planners.

Operator

Next question from Marcus Rivaldi from Morgan Stanley. Please go ahead, sir.

Marcus Rivaldi – Morgan Stanley

Two quick questions from me. Firstly, on the cash, if you are that far ahead of your expectations or sorry the $3 billion run-rate, what are you planning to do with that excess cash? And then secondly, just a quick question on the UK. The combined operating ratio -- combined ratio there, sorry, 88%; an exceptional performance there. Given it's a very tough market, could you give some sort of color as to what's driving that performance? Thank you.

George Quinn

Marcus, on the first one, I guess I can only point to what we said earlier. The cash is really demonstrating our ability to turn the earnings into cash and bring it through the Group to a place where we have freedom to choose what we do with it. And I'd only point to the priorities we mentioned earlier, that our priorities are number one dividend, two business growth. And then three, if we still have excess, and excess determined by the target capital levels, going back to Andy's question, we would look to return it to shareholders in the most efficient form possible.

On the UK, the real driver is PYD. That's why you're seeing a combined ratio that's, I guess, slightly abnormally low.

Marcus Rivaldi – Morgan Stanley

And just on the cash point, coming back to that, given that I guess you're also guiding that perhaps over the three year it's still closer to the $9 billion is where you're really thinking, I guess this should be read that this just gives you more comfort that can be achieved and ultimately gives greater comfort over the dividend at the current level. Would that be the best way to think about it?

George Quinn

Yes, I think that's not a bad way to think about it.

Operator

Next question from Peter Eliot from Berenberg. Please go ahead, sir.

Peter Eliot – Berenberg

Just one remaining question, please, and it was just on the -- within life on the new German regulations. You refer to a negative impact of $37 billion offset by some modeling changes. Just wondering if you could just clarify the impact you expect on an ongoing basis from those new regulations. Thank you.

George Quinn

So, from an ongoing perspective, we don't expect it to have any significant impacts. We expect to be able to deal with it through the discretionary allocations.

Operator

Next question from Andrew Ritchie, Autonomous. Please go ahead.

Andrew Ritchie – Autonomous

Just a follow-up question. Could you just talk about claims trends on the P&C side? I'm more interested really in the spread between written rate change and loss cost trends. Is it fair to say now written rate change more or less equals loss cost trends or shouldn't we look at it in aggregate because obviously it's a different picture in individual portfolios? Maybe just some sense of what you're seeing on claims trends in the key areas would be helpful.

And on German life, just to clarify, did you say the swaption program had now been taken off? Is that part of a deliberate re-risking or why has that not affected the duration which you said is unchanged? Thanks.

George Quinn

So first of all, on claims trends, I think -- overall, I think your summary is a decent one. I think we have the benefit in the quarter of the earn-through of a prior positive margin impact from rates. But we think that loss costs are certainly rising and certainly coming close to what we're seeing from rates. So from an overall -- the element that falls to the bottom line, it's probably not as significant as it was before and it may well be close to flat in the current market conditions.

On the swaptions, so again, to repeat, we have removed them and I guess we're not running this business any more either. I guess we're learning to look at alternative ways of managing the portfolio. But in terms of why it hasn't impacted duration, I don't know. I'd need to come back to you, Andrew. I don't have the immediate answer to that question.

Andrew Ritchie – Autonomous

And does it mean there is a bigger interest rate sensitivity to the overall capital model or is it because you've found alternative ways that mitigate it?

George Quinn

Sorry, I was just listening to someone else. So the --

Andrew Ritchie – Autonomous

Obviously, because it reduced the interest rate sensitivity somewhat having those in the economic capital model and the EV or MCEV, does that mean the interest rate sensitivity has now risen or have the alternative ways of managing it mitigated that?

George Quinn

The interest rate sensitivities will be higher.

Operator

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

Michael Huttner – JPMorgan

Just two questions, on the reinsurance slide, 32, so you did -- you had part of the program which you did in July. Could you talk a little bit about what the changes were, both in terms of how you position yourself and in terms of the cost of it? And then, I've probably got this completely wrong. I was trying to read your speaker notes, but I was also trying to compare with what you said and I'm sure I got it wrong. But has farmers now -- has it reduced the amount of reinsurance it buys in total? And what is the new number? In the speaker notes I can't see anything, but it may be you said it and I've probably completely missed it. Thank you.

George Quinn

So in nat cat reinsurance, I don't have the precise numbers. Obviously we benefit from the market movement. So there'll be a margin improvement overall for us, given the reinsurance market trends that you can see at the moment. But I don't have a precise figure for you, Michael, in terms of the benefit.

Michael Huttner – JPMorgan

The reason I asked is it was a little bit a trick question, because in January what you did is you bought more cover higher up with the saving. In other words, there was no cash saving. It was just you had more higher up cover, which if there are no nat cats actually doesn't deliver. But I'm guessing from your answer here that you actually kept the same cover and you paid a bit less, but maybe I'm wrong.

George Quinn

No, you're correct. I'm getting short-term memory problems today. Can you repeat the second question again?

Michael Huttner – JPMorgan

Yes, I'm sorry. So, really simple. I had in mind that farmers buys 18.5% reinsurance. I thought this was still the case and I just wondered, A, am I right and has it changed?

George Quinn

Yes, you're absolutely right. I guess what we signaled on the video and in the speaker notes is that -- I think at Q1 we decided that farmers is operating above its target surplus range, that we'd planned to use its capital strength to reduce the quota share at the yearend. Through Q2, it's roughly back where it started the year, given the frequency and the nat cat experience that it's had in Q2, but it's still above the range. So we still expect it to reduce reliance on the quota share, but at the end of this year.

Martin Senn

Just to add to that, Michael, the all lines quota share with us is still the 18.5%, and then they have obviously an agreement in the marketplace. I think that runs to around 1.5%. That's virtually unchanged from the last time we reported that.

Operator

The next question is a follow-up question from Mr. Dalla Palma from Exane BNP Paribas. Please go ahead.

Dalla Palma – Exane BNP Paribas

Just one follow-up question on the ZECM, and specifically on the model changes. We have had a few points up last year, a few points down this quarter. Just if you could clarify whether there is any further refinements already planned, or whether it will be only driven by potential regulatory changes from here on. Thank you.

George Quinn

We're doing our best to try and avoid model changes that would drag the thing up and down. We look at maintenance of the system every year, but I'm currently not aware of anything that would have a significant impact on the model going forward. But there is always the possibility that we have a particular area where we see a need to make a change, or a regulator has a view where they would propose something. But I don't see anything at this stage, Niccolo, either up or down.

Operator

We have a follow-up question from Thomas Seidl at Sanford Bernstein. Please go ahead, sir.

Thomas Seidl – Sanford Bernstein

It's on slide 6, the life waterfall. Just two questions here. The in-force management, I think at the investor day you mentioned the UK is (indiscernible) at the start. I wondered, to what extent have you already now seen the tangible benefit of this in-force management? And the second is what do we have to expect on the other category in this waterfall chart?

George Quinn

Maybe if I talk through it a second, Thomas, just to give everyone the benefits, the VIF unwind is the natural run off of the portfolio. In-force management is mainly focused on Europe, so I guess we've seen a relatively small proportion of that yet. I think the team have very solid plans that are pretty detailed and we have high confidence in that. On priority market growth, I think there is a risk that you would look at that and think, well, that's something that they have to grab in the future, and that would be partially true.

But of course, some of this will come from, for example, some of the bancassurance deals that we've done that tend to have -- tend to be less profitable, again, because of the shape of amortization of the initial commission or the initial expense. Those are the key items on the waterfall.

Thomas Seidl – Sanford Bernstein

Just on the in-force management, can you give us a percentage? How much do we see year to date of this $20 million to $25 million?

George Quinn

I don't have a precise figure in my head, but it's less than half.

Thomas Seidl – Sanford Bernstein

Less than half. All right. Thanks a lot.

Operator

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Mr. Senn.

Martin Senn

In closing, while we do recognize that there is still much work to be done, we are pleased with the progress we have made to date, and we remain confident that we're on track to fulfill our ambitions for 2014 to 2016. Our achievements include good progress on our strategy in general insurance, to turn around or to exit underperforming businesses and to deliver an improved accident year combined ratio.

Global life is implementing its in-force management initiatives and progressing its priority market growth strategy, and we definitely do see further positive strength from the farmers exchanges with the improved customer satisfaction and also agent retention we have shown you in the slides. At the same time, we continue to generate strong cash remittances, which do underpin our attractive and sustainable dividend.

And with that, I want to thank you all for your attention, for your continued interest and also for your good discussion and good questioning today. And I very much look forward to soon connect again. Thank you very much and do have a good day.

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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