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Executives

Debra Broek – Head, IR

Martin Senn – CEO

Pierre Wauthier – CFO

Analysts

Spencer Horgan – Deutsche Bank

Brian Shea – Bank of America Merrill Lynch

Brian Shea – Bank of America/Merrill Lynch

Andrew Ritchie – Autonomous Research

Andy Broadfield – Barclays Capital

Farooq Hanif – Morgan Stanley

Stefan Schuermann – Bank Vontobel

Michael Huttner – JPMorgan

Vinit Malhotra – Goldman Sachs

Michael Klien – Nomura

Atanasio Pantarrotas – Cheuvreux

Paul Bradley – Citigroup

Martin Vézina – ING

René Locher – MainFirst

Zurich Financial Services Ltd. (OTC:ZFSVY) Q3 2011 Earnings Call November 10, 2011 7:00 AM ET

Martin Senn

Welcome to Zurich Financial Services Nine Months Results Presentation. I am proud to report that we have again delivered strong growth in net income and a solid underlying operating performance for the first nine months of 2011 as well as the discrete third quarter. Importantly, we have maintained the quality of our capital and solvency position, which puts us in an enviable position to continually assess opportunities for profitable expansion in both mature and emerging markets. This performance is now a small part due to sound risk management actions and our continuing commitment to our strategy of diversifying into higher growth markets while maintaining our strict focus on margins and profitability.

Let me briefly highlight some of our achievements over this period. Our strict focus on managing assets relative to liabilities on the risk-adjusted basis and on sound risk management has helped us generate a net return on group investments of 3.9% or 4.4% if we include changes in unrealized gains. Both figures are non-annualized, so over the nine months an impressive result in this lower yield environment.

We also continue our disciplined approach towards Eurozone peripheral government and bank corporate debt, ensuring risk is well balanced and diversified to protect shareholder and customer assets.

In emerging markets, we were able to close two major transactions. Our long-term alliance with Banco Santander is now finalized and closed in all the five Latin American markets included in this deal that is in Brazil, Mexico, Chile, Argentina and Uruguay. This allows us to expand our life and General Insurance distribution capabilities in this fast growing region.

In Malaysia, we completed the acquisition of Malaysia Assurance Alliance Berhad, enhancing our presence in the region as a full-service insurance provider and we have continued to streamline our operations, kept a firm grip on expenses and maintained our underwriting discipline. Most importantly, we continue to generate solid cash flows from all areas of our business.

So, let’s have a closer look at the numbers. Net income for the first nine months was $3.2 billion, a gain of 34% of which $1.2 billion or 64% more than in 2010 was earned in the discrete third quarter, also benefiting from revaluations and capital gains on hedges and bonds.

An unusually high frequency and overall severity of catastrophes and significant weather-related losses over the nine months led to an 8% drop in business operating profit to $3.3 billion. These losses include previously reported claims related to nature events, like the flooding and earthquakes in Asia Pacific and the tornados in United States in the first half of the year. Events like Hurricane Irene also in U.S. and hailstorms in Switzerland and Germany have weighted on the performance in the third quarter. Despite these challenges and a difficult economic environment in which we operate, we have continued to generate solid profits.

In General Insurance, our sustained focus on margin enhancements has continued to improve the underlying loss ratio. Strong action has helped us to rein in costs, balancing expense management actions and investments in emerging markets by gross written premiums and policy fees through a focus on selected growth remained flat on a local currency basis. We also achieved average rate increases of more than 3%, while simultaneously improving customer retention.

Global Life has also continued to make excellent progress in achieving its strategic objectives with around 26% of new business value generated during the first nine months. Stemming from high growth markets in Latin America, Asia and the Middle East closed our stated 2030 target of 30%. And this is even before accounting for the Santander deal and our acquisition in Malaysia.

Overall, new business volumes rose 4% on a local currency basis, despite challenging market conditions in some of our mature European markets. And at Farmers, we continue to see underlying gross momentum in the Farmers Exchanges, stable margins at our Management Company and progress in leveraging the Exchanges multichannel distribution through cross-selling between 21st century and the agency channel.

The environment in which we operate remains volatile and challenging, particularly with the continuing uncertainties in the eurozone, but these results give us confidence that we're well positioned to continually assess opportunities for expansion in both mature and emerging markets. We do this the Zurich way with discipline and focus. We are pleased with these results; we are in a very strong position and continue to thrive in a challenging environment.

In closing, I would like to thank all our employees whose hard work and dedication to helping our customers manage and understand risk make these results possible. Thank you.

Pierre Wauthier

Good morning, ladies and gentlemen. First of all, let me say how pleased I am to be presenting my first set of results. And even more so that they are such a strong set of results. This is thanks to a robust underlying operating performance and risk management actions paying off in a challenging market environment.

So for the quarter in context, the discrete Q3 business operating profit was down 11% over the prior year, reflecting the poor financial markets and higher weather-related losses. However, the third quarter net income attributable to shareholders increased 64% to $1.2 billion, benefiting from gains on derivative positions used for hedging economic exposures and realized profits on the bond portfolio.

These capital gains reflect our risk management philosophy of protecting our balance sheet against underlying business or investments deterioration and rebalancing group investments in order to optimize its risk return profile. Clearly markets move, so the market value of our derivative hedging positions will also move with the impact reported in the P&L.

Our capital and solvency ratio quality is essentially unchanged with shareholders equity stable at $32 billion as of September 30 and our SST ratio at 225% as of June 30. General Insurance generated a business operating profit of $1.7 billion, down 12%. However, we have seen progress on executing on the targets with continued rate increases and the results of portfolio management actions reflected in the improved underlying loss ratio.

The impact of Major CATs, particularly in Asia-Pacific in the first quarter and large losses such as the tornados in the U.S. in the second quarter as well as hurricane Irene in the U.S. and hailstones in Europe in the third quarter resulted in Major CAT and larger losses being about $800 million higher compared to last year. This was partially offset by the improved underlying loss and expense ratio contributing about $500 million to the underwriting results.

Global Life reported business operating profit of $1 billion. Increased fee income from higher average assets under management and higher risk margins from the focus on protection were more than offset by the continuing investment in the business as well as the depressed stock market levels at the end of Q3.

The business operating profit of $1.1 billion for Farmers reflects the reduced quota share to 12% since the beginning of this year. the Farmers Re results were also impacted by the weather-related losses in the second quarter as well as hurricane Irene and Texas wildfires in the third quarter.

For Farmers management services, while management fees are down compared to last year, we continue to see improvement quarter-over-quarter following the growing top line of the exchanges.

Other operating businesses costs increased compared to last year, reflecting the strong Swiss franc and the effect of positive one-off items in 2010. Non-core businesses reported an improved result as last year included higher loan loss provisions while this year includes the positive revaluation of the center visibility portfolio as well as favorable development in certain books.

On the basis of our ongoing review of the bank loan provisions, we have added $57 million in the third quarter 2011 against a backdrop of poor property markets in the UK, outside London and in Ireland, bringing the provision for this year to $108 million year-to-date.

We made very good progress on unlocking capital from the non-core operations as evidenced by the announced transfer of the Zurich Specialties London Liabilities and the sale of our Danboro Bank deposits. The approval was received from the FSA to return our UK banking license, which we completed on September 30.

The reported business operating profit after tax return on equity for the nine months was 10.6%. The disasters and weather-related losses in Asia Pacific and the U.S. reduced the return by 3.8 percentage points at nine months. Net income after tax return on equity for the nine months was 13.5%, reflecting the strong net income results.

General Insurance continues to face an unchanged macroeconomic environment that is characterized by low GDP growth in [mature] markets, low yields and high losses from natural disasters. Despite this environment, General Insurance delivered a strong underlying performance with rate increases earning through, supporting continued improvements in the underlying the loss ratio. The reported result continued to be negatively impacted by higher levels of event and weather-related losses.

However, the extraordinary frequency of these loss events has triggered our global aggregate CAT reinsurance cover for which we have booked an estimated recovery of about $45 million.

I would like to highlight at this point that the result in Germany has been affected by a number of issues in the third quarter. Hailstorms caused losses of about $35 million. We have strengthened reserves in particular on prior years for medical malpractice and architect liabilities of about $100 million in total, where we saw further deteriorations in trends. We also changed assumptions in certain unearned premium reserve calculations resulting in an adverse impact of about $50 million.

In addition, we uncovered some errors in the conversion of our books from German GAAP to IFRS, affecting loss reserves, unearned premium reserves and deferred acquisition cost for some specific products, and we have restated prior periods accordingly. As these errors mostly arose in earlier years, the material adjustment is to the 2010 opening balance where equity is reduced by $80 million. The corresponding restatement adjustments to the 2010 and the half year 2011 P&L were only minor.

The implementation of the General Insurance strategy, which started last fall, is continuing to show results. Our stance on pricing and underwriting discipline is unchanged and rates continue to go up with a rate increase of 3.4% as you can see on the slide for the nine months, which is a step-up over the half year at 3.2%.

Portfolio management actions to ensure adequate levels of profitability continue to be implemented. Nevertheless gross written premiums are flat in local currency at the nine-month and show a small increase in the third quarter of 1%, which represents a further recovery.

Our stance on underwriting discipline remains unchanged. We continue to push rates in a balanced way to drive profitability. As said before, General Insurance rates increased on average 3.4% in the nine months.

Overall, we see that the distribution of these rate increases across the different portfolios shows a similar pattern to the half year while we see an acceleration of rate increases in North America Commercial in the third quarter.

Now let’s look at the rate change and top line performance of our individual market units in more detail. Global Corporate achieved average rate increase of 3% as well as higher customer retention, while gross written premiums were up 4% in local currency. This top line growth includes a higher level of captured business for corporate customers.

In the U.S. and in Europe, the continued focus on profitable customer relationships led to an increase in retention and new business. We continued our expansion in Asia and the Middle East with strong new business.

North America Commercial has confirmed its strength of firming rates, increasing further to 4% in the discrete third quarter after just below 3% at the half year. This has been driven by increases in all major lines of business led by worker’s compensation with an increase of about 9% in the third quarter.

Overall, we consider this to be a very good result in a very competitive market. In the discrete third quarter, premiums stayed flat, bringing the nine months top line reduction to 2% after a reduction of 3% at the half year. This decrease reflects the reshaping of the portfolio as well as the challenging conditions in the U.S. where insured exposures continued to be affected by the slow economic recovery, in particular in industries, such as construction and automotive where NAC’s book is strongly exposed. However, we see indications of stabilizing economic conditions in the third quarter. Adjusting for a portfolio transfer of about $100 million in the third quarter of last year, premiums increased in the third quarter this year by about 4% while insured exposures stay largely flat.

Let’s now turn to Europe. Rate increases in European personal lines have continued to stay similarly high as in the last eight quarters driven by the U.K. and Italy. And the U.K. personal lines motor book, these rate increases continue to improve the accident year loss ratio confirming the trend from the half year. Commercial and corporate lines in Europe saw similar rate increases as at the half-year.

Overall, increases continue to be at a healthy level and help to support the profitability of these portfolios. Europe’s premiums overall reduced by 3% in local currency in the nine months, even though we have achieved rate increases. Premium levels reflect the split economic environment in Europe as well as our targeted re-underwriting strategies. As such, targeted actions in our personal lines book in the U.K. and Italy explained about two-thirds of the decrease in the nine months. Overall, both new business and retention rates are up in Europe.

Finally, international markets premiums increased 10% in local currency with growth in Latin America of 20%. This increase is driven by property and motor in Brazil as well as motor in Argentina. In the region Middle East and Africa, premiums are slightly down, mainly from re-underwriting actions taken in South Africa. However, we have seen growth of 7% in local currency in Asia-Pacific.

As you can see in the chart on the left, the underlying loss ratio continued to improve 2 percentage points in the nine months to 64.4% consistent with our improvement of 2.2 percentage points in a half year.

As quarterly underlying loss ratios can be affected by adjustments, it is important to focus on year-to-date ratios. Rate increases and portfolio management actions taken in previous quarters continue to earn into results.

Looking at the components in more detail; in the second column on the left, you’ll see prior year reserve of the releases, which amounted to $916 million or 4.2 percentage points. These releases emerged from various regions and lines of business across our global portfolio, such as the motor business in Switzerland and general liability in North America. The releases are net of some prior reserve increases, such as some general liability lines in Germany, which I have already mentioned.

Next Major CAT includes in the third quarter loss estimates of $105 million from Hurricane Irene, which affected the U.S. East Coast. This category also includes the three Asia-Pacific events reported in Q1 and the aftershock earthquake in New Zealand in Q2. We have left our loss estimates unchanged for these events.

Moving on to large claims; as already discussed 2011 to-date has been characterized by an extraordinary frequency of event and weather-related losses. In the second quarter, we flagged $200 million or 0.9 percentage points of the loss ratio related to tornados in the U.S., and the third quarter has also been active, severe hailstorms in Switzerland and Germany alone added about $130 million. Together these added 1.5 percentage points to the loss ratio for the nine months.

The experience over the last quarters’ reflect the volatility, which is inherent in a global book covering large risks like ours. However, we see no specific trends for large claims in terms of loss type and location. We believe that our risk and aggregation management is effective. It is part of our business to constantly monitor the large claims experience and to make continuous improvements and refinements to our processes in underwriting and claims.

In summary, the overall reserve adequacy is unchanged. The underlying loss ratio in the nine months maintained the improvement of two percentage points, and rate increases and portfolio management actions taken in previous quarters are continuing to convert into results.

We are working on our overall expense base to achieve the ambitious cost cutting targets by year-end 2013, as announced at our December Investor Day. The expense ratio in the nine months decreased by 0.3 percentage points as we continue to manage expenses tightly. The other underwriting expense ratio reduced, while net earned premiums went down in local currency.

In local currency as well, other underwriting expenses decreased by about $50 million or 2% driven by lower marketing spend in our European direct operations, and reduced expense levels in North America Commercial. Our continued drive to increase efficiency in the business is also reflected in a reduction of headcount by 4%.

Firstly, I would like to frame the Global Life results in relation to three aspects; one, Q3 was one of the most volatile quarters since 2008 for equity markets, with levels sharply down from those seen at the end of last quarter as well as compared to the end of the third quarter last year. Two, the tough competitive and economic landscape within Europe persisted. Our pricing discipline in these markets will continue focusing on profitability over volume. And thirdly, we continue to selectively invest in the business in line with our strategy.

With this backdrop in mind, I will now turn to the key performance indicators. Gross written premium, policy fees, and insurance deposits increased by 2% to $19.4 billion, although they decreased by 4% in local currency terms, as growth mainly generated in the UK and Asia-Pacific Middle East did not fully offset the reductions coming from Spain, Ireland, and Germany.

Net inflows to assets under managements remain positive at $1.6 billion, a good result considering the aforementioned pressure on premium inflows. While reported new business value increased by 14% in local currency, it does include a refinement in our methodology for calculating new business value for corporate risk business. Excluding this change, new business value was broadly flat in local currency and new business margin was 22.4%.

As mentioned, in framing the quarter, the competitive landscape in Europe remains tough, with increasing pockets of uneconomic pricing, particularly in Spain and Ireland. Pricing discipline and product mix management is fundamental in these markets and we are committed to continuing our discipline. This is evidenced by our success in focusing on higher margin protection products over savings product volume in Spain.

We have also observed consumer caution on investing in unit-linked products in Germany and Italy as markets remain volatile. That said, we have continued to drive value growth within Europe in areas such as Corporate Life & Pensions in the UK and Switzerland, and Private Banking Client Solutions in the UK.

In the U.S. growth in protection sales continued, while sales volume increased by 15%. Over the same period a year ago, the new business value reduced by 24% following a change in persistency assumptions at the end of 2010. New business margin is at the healthy 44%.

In line with APE growth solid margins in Latin America and Asia-Pacific & Middle East enabled strong organic growth in new business value of 21% and 24%, respectively. While the Corporate Life & Pensions pillar gained traction, particularly in Brazil and Mexico, Asia-Pacific & Middle East growth came from corporate savings and individual protection product.

Reported business operating profit decreased 8% to $1 billion or 15% in local currency terms. As mentioned when framing the quarter, the reduction is largely financial market-driven combined with a continued investment in the business.

While we have seen higher fee income generated from higher average assets under management levels, the sharp decline in stock markets in Europe, predominantly in the UK at the end of the quarter, resulted in an acceleration of DAC amortization negatively impacting BOP by some $50 million. This effect can go up as well as down depending on where the stock market closes at the end of the quarter, creating some volatility to the underlying earnings.

It is worth reminding you at this point that the impact to equity-driven fees in the UK is economically mitigated by a derivative hedging program that is not revalued in business operating profit, but only effects net income. Similarly, economic hedges managing interest rates risk coming from our German life book also had a positive impact on the Group's net income. Excluding the market-driven impacts, earnings remained resilient as we focused on executing our strategy.

Within the bank distribution pillar, solid growth in several European countries was more than offset by reduced volumes of single premium sales in Germany and significantly reduced volumes of savings product in Spain. Despite the volume pressure, the continued emphasis on protection products in Spain contributed to improving the bank distribution margin by 3.9 percentage points to 28.9%.

IFA/Brokers, new business value decreased by 16% in local currency as volume growth in North America and Latin America was more than offset by lower sales in the U.K. on the Irish domestic market. Volume decreased marginally on a local currency basis within the Agent pillar, as increased sales in Switzerland and Latin America were offset by reduced sales into Italy and Germany. The change in persistency assumptions in North America was the main contributor to reducing the pillars margin and new business value.

International/Expats new business volume grew by 17% while new business value grew by 30% in local currency as the pillar secured distribution with key banks and large brokers in the Middle East.

Corporate Life & Pensions continue to establish itself as a core growth pillar for the Group building on previous quarter’s momentum in delivering volume and value in most regions, especially from business generated in the U.K. and Asia-Pacific Middle East. Excluding the corporate protection methodology of refinement, new business value still increased by 42% on a local currency basis over the same period a year ago. As with the first two quarters of the year, the appetite for world solutions in the private banking sector in the U.K. continued into Q3, allowing the continued placement of tranches of investment bonds through bank partners in the UK.

Now, let’s look at our third segment, Farmers, which operates in the U.S. The economy there continues to face slow growth and a high unemployment rates. For the U.S. Personal Lines market, Western States into a stagnant environment with auto sales still far below mid-2000s levels and continued weak new home sales. In this context, Farmers Exchanges delivered very satisfying premium growth, which I will talk to later.

Business operating profit of Farmers Management Services amounted to $1 billion for the first nine months, down 3% compared to the previous period. This decline was driven by lower management fees due to the runoff of the 21st Century Agency Auto book. In the discrete third quarter, this impact, however, has further reduced and been compensated by premium growth elsewhere leading management fees and other related revenues virtually unchanged.

At Farmers Re, business operating profit for the first nine months was $76 million; $172 million lower than in the previous period, reflecting the reduction in the All Lines quota share treaty to 12% and the severe CAT and weather-related loss at the Farmers Exchanges.

CAT losses added 6.9 percentage points to Farmers Re third quarter combined ratio of 101.8%, significantly less than their second quarter, but 4.5 percentage points more than in the previous year period. The additional CAT losses experienced in the third quarter nearly exhausted the limit of allowable CAT losses in the All Lines quota share treaty. For that reason, CAT activity in the fourth quarter will have a minimal impact on Farmers Re.

Gross written premiums of the Farmers Exchanges, which we managed, but do not own, grew by 0.3% to $13.9 billion year-to-date. Adjusting for the runoff of the 21st Century Agency Auto book, growth was 1.1%. The growth momentum emerging in the second quarter continued into the third quarter, with gross written premium growing by 1.8% or when adjusting for the runoff of the 21st Century Agency Auto book growing 2%.

In fact, all major business lines including Farmers homeowners experienced growth in third quarter, and achievement mirrored in improved retention rates across the Board. The Farmers Exchanges combined ratio was a 107% year-to-date and a 106% in the third quarter. As already indicated above, there were further CAT losses in excess of $300 million in the third quarter with Texas wildfires and a hurricane Irene alone contributing over $140 million.

The Farmers Exchanges surplus ratio was 36.5% at the end of September, down 1.9 percentage points from the 38.4% at the end of June. Mainly driven by the above mentioned CAT losses. This ratio continues to be within our target range.

Now turning to investments. Net investment return for the first nine-month was 3.9% compared to 3.2% for the previous period, primarily driven by higher net capital gains.

Net investment income declined 3% in local currency due to the lower asset base and cash flows being reinvested at lower yields. Net capital gains on investments more than doubled reaching $2.2 billion, up $1.6 billion in the third quarter alone. This reflects the significant capital gain from selling part of our stake in New China Life Insurance in Q2 and third quarter gains on derivatives, which the group uses exclusively for economic hedging as explained before.

The $1 billion of derivative gains arose from hedging interest rate and equity risk in our life operations and one-off variable annuity risk in our non-core operations as well as protecting our European equity portfolio from the ongoing eurozone crisis.

Furthermore, our fixed income asset managers continued to actively manages their risk profile of our portfolios in Europe and North America to ensure that risks were adequately rewarded in the current market environment. These activities led to gains of approximately $450 million in the third quarter.

Impairments on equity investments taken in the third quarter were relatively small at $121 million. As already mentioned, there were $57 million of additional loan loss provisions taken in our one-off banking operations.

The $1.7 billion improvement in net unrealized gains in the third quarter also needs a comment. It was driven by a strong revaluation of the government bond portfolio due to the significant fall in yields, which more than compensated for the decline in equity portfolio evaluations and increase in credit spreads.

We mentioned at our half year results presentations in August, the measures we were taking to balance and diversify our exposures in relation to the Eurozone debt crisis. These measures primarily contributed to a reduction of our holdings of Italian government bonds to $5.7 billion from $8 billion at half year. At the same time, we had increased our exposure to German books.

Our holdings of Italian and Spanish government bonds continue to be significant in absolute amounts. However, these holdings along with our Portuguese and Irish government bonds are no more than 6% of our total Group investments and mostly matched insurance liabilities in the same countries.

Our investments in bank debt securities are of good quality and highly diversified. They include subordinated debt of $3.1 billion, of which only 39% relate to Eurozone. The total sub-debt exposure is diversified across over 100 issuers with the average issuer exposure being approximately $30 million. Again, this has to be put in the context of Group investments of about $200 billion.

Finally, our net equity exposure at the end of September was 2.7%. This is lower than the 3.5% we’ve reported at the end of June due to the fall in equity values as well as the purchase of Euro STOXX-puts.

In summary, our total investment result for the first nine month of 4.4%, which included the particularly challenging third quarter, is very satisfying. It reflects our disciplined investment approach and our prudent risk management.

The balance sheet remains very strong. Shareholders' equity overall increased by $800 million in Q3 to $31.9 billion, largely driven by the strong net income attributable to shareholders of $1.2 billion, with an effective tax rate of 22.3%.

In July, we successfully issued two Swiss franc senior notes totaling CHF 750 million at competitive prices, refinancing a senior note maturing at the end of July of CHF 1 billion. In October, we successfully issued an additional CHF 425 million senior note. The successful placement of these notes at attractive spreads in those volatile markets reflects the recognitions of Zurich’s name and its strong capital and solvency positions. The book value per share has increased from CHF 180 at half year to CHF 198, recovering from a decline of 11% at half year to only 2% down compared to year end.

Our Swiss Solvency Test ratio as filed for the half year was 225%, materially unchanged from the year-end 2010 filing and in line with our estimate at the half year results. We don’t run a full calculation quarterly, although we do monitor the development of our estimated economic solvency on a frequent basis. This allows us to give an indication of the SST ratio as at the end of Q3.

We expect the ratio to have been negatively impacted primarily by the sharp fall in interest rates especially in euro, although the derisking actions outlined last quarter will have gone some way to reducing the impact. Therefore, I am confident that the SST ratio remains above 200%.

I’d like to remind you that the model is still subject to approval from FINMA. We’ve received notice that formal approval will more than likely now take place in 2012, as FINMA continues to review submissions and assess the impact that the SST will have on the industry. In the interim, we received model approval on a provisional basis.

In summary, we continued to be pleased with the results for the year and our ability to withstand the market volatilities. We remain focused on our underwriting discipline as evidenced by the steady underlying loss ratio improvement of General Insurance of two points, our continued strong new business margin in Global Life of 26.3%, and our consistent margin above 7% in Farmers.

We saw continued growth in the third quarter, supported by good progress on our emerging market strategy with strong Global Life APE organic growth in these regions. Our improved performance in the mature markets came from strong delivery by Global Life’s Corporate Life & Pensions pillar within Europe, growth from Global Corporate as well as Farmers growth momentum continuing in the third quarter.

Our shareholders’ equity increased further to almost $32 billion and our strong SST ratio is maintained. We remain focused on what we can control and will continue to execute on our strategy towards the delivery of our announced target. Thank you.

Operator

Good morning or good afternoon. I am Stephanie, the Chorus Call operator for this conference. Welcome to the Zurich Financial Services Results reporting for the Nine Months to September 30, 2011 Analyst Conference Call. Please note that for the duration of the conference call, all participants will be in listen-only mode, and the conference is being recorded. After the introduction, there will be an opportunity to ask questions. (Operator Instructions) This call must not be recorded for publication or broadcast.

At this time, I would like to turn the conference over to Mrs. Debra Broek, Head of Investor Relations. Please go ahead, madam.

Debra Broek

Thank you, and good day to everyone. Welcome to our call. I would just like to remind you that since for the last while we’ve been – for the first and second and third quarters have been putting the video up on the system. We will just have a few short remarks before we go right into the Q&A.

So first of all, it’s my pleasure to turn it over to Martin Senn, our CEO.

Martin Senn

Thank you very much, Debra; and thank you all of you for joining us today. Good morning, good afternoon, and hello. I would like to welcome and introduce Pierre Wauthier, our new Chief Financial Officer who together with me will take questions later on after some introductory remarks as well from Pierre.

Let me also make a point that we are pleased with the results we have presented. I think the results highlight that we are in a strong position; even through the economic environment is very challenging. We want to demonstrate these results, the success of our strategy, and particularly our focus on profitability and market risk mitigation.

And with this short introductory comment, hand over to Pierre. Thank you very much.

Pierre Wauthier

Thank you Martin and let me say, I am very pleased to be here presenting the nine months results for the first time. I know you’ve read and seen the slides and those disclosures so I’ll be brief. Just a little reminder, we generated a strong Q3 net income supported by sound risk management actions. I think we delivered solid underlying operating results with continued focus on underwriting discipline. We are pleased to see improved growth in the third quarter supported both by good growth in the emerging markets and also seeing our actions to improved performance in mature markets paying off.

We maintained the quality of our capital as well as our solvency, despite these volatile markets and this is very much in line with our risk mitigation strategy. And of course we remained focused on what we can control and we’ll continue to execute on our strategy towards the delivery of our announced targets.

And with that I am now happy to take questions from the audience.

Debra Broek

So this is Debra again and just a brief reminder as we go into the Q&A. I would ask that you please keep your questions to two per participant at a time, so we can allow everyone to ask their questions because we do have a number of people on the line. So if I can turn it over to the moderator please.

Question-and-Answer Session

Operator

We’ll now begin the question-and-answer session. (Operator Instructions) First question from Mr. Spencer Horgan will come from Deutsche Bank. Please go ahead, sir.

Spencer Horgan – Deutsche Bank

Thank you very much. Good afternoon. Three questions for me. The first one is – thank you very much for the update on the Swiss Solvency Test. It’s actually quite comforting to stay still at such a healthy level. I was wondering if you can give us a perspective on where on the balance sheet looks, for example in the rating agency point of view, so under the Standard & Poor’s model. Is that any sort of a constraint at these levels? Is it sort of an alignment fee at AA level, maybe you could give us a view there?

And then second one is a little bit detail, I’m afraid, but if I try and back out what the combined ratio was in Germany in the third quarter standalone. It looks like it’s in the order of 130%. I know obviously the way it was fairly bad in Germany in the third quarter. But is there anything else strange going on in that number and so where does this sort of restatement going on somewhere. So I’m just trying to understand what the underlying and underwriting look like in Germany in Q3? Thank you very much.

Debra Broek

Okay. And Spencer, thank you very much for your questions. The first question is less SST, but I think you’re wondering about the rating agency and our capital adequacy with regard to that. First of all, let me remind you that we enjoy very strong rating with Aa3 from Moody’s perspective and AA minus from S&P, we’re also at A plus with AMS and all of these ratings are with a stable outlook.

And as you also know, we have a regular contact with (inaudible) with the rating agencies and we do not expect a change from that perspective. Moody’s does not hold the formal capital adequacy model, and as I already indicated believe that our rating is stable, and we don’t expect that to change. On the S&P side, the pure capital adequacy is one of the many elements that S&P takes into account for the rating.

There are many other elements, such as interest coverage, such as the quality of capital that also take into account. Surely from a capital adequacy perspective, we’re a little bit lower than the pure AA rating would indicate, but as the rating agency itself says, the overall strength, as well as the overall elements on leverage coverage et cetera easily offset that.

With regards now to Germany, you indicated a combined ratio estimated of 130%, I will not – I’ll let you do your own calculation, what you we need to understand indeed that is several things that have happened in Germany. One is that, we – Germany has been affected by hailstorms of about 35 million in the third quarter. The other part is that we took a number of collections, one is we reevaluated the reserves in particular on five years for both medical malpractice and architect – architect liabilities, sorry, about $100 million where we saw some further deteriorations in trends and there’s also some change in unearned premium reserve of about 50 million.

So if you add all of these elements, it’s a $185 million, which explains most end of deterioration with the combined ratio. I think it’s important therefore to stress however that all of these elements are one-offs in nature. We do not expect – the strengthening was following a detail analysis of that book, of course, catastrophes; that’s unpredictable. Does that answer your two questions?

Spencer Horgan – Deutsche Bank

Yeah. Thanks very much. Just on the S&P I think I’m right in saying as we have been slightly under the quantified level of capital for AA for a while, as mentioned otherwise, hasn’t really acted as a problem in the past?

Debra Broek

That is correct. I think I’ve illustrated that. It’s not that far off. As I’ve said, there are many other elements that more than offset that. S&P also recognizes that they’ve got – they’re tied by their own model which does not take into account other elements, for example, they don’t fully take into account SST ratio and that is also taken into account in the actual capital adequacy itself, in terms of offsetting factors with regards to the pure number.

Spencer Horgan – Deutsche Bank

Yeah, exactly. Thank you very much.

Debra Broek

Okay.

Operator

Next question is from Mr. Brian Shea from Bank of America Merrill Lynch. Please go ahead, sir.

Brian Shea – Bank of America Merrill Lynch

Good afternoon. Two questions, please. First of all on the life insurance part. Just remind us what are – the Latin American acquisition that you announce this February, I don’t think any of that is in the consolidation yet. So if you just remind us on the kind of time line for that entering the consolidation and any help at all if you give us in the mechanics of how that will affect the BAP would be great – very, very, very much – I’d be very grateful for that. I’m not asking for a forecast, more just the mechanics to help us quantify how the BAP is going to change and let them – if comes online.

And then secondly, what is your new money yield? I’m trying to get a feel for how the running yield will be progressing as you go into 2012. I calculate the running yield of the nine-month stages and annualized 3.7%, and I just don’t understand how that – the new money yield compares to that. Thank you.

Debra Broek

Okay. Hello Brian. So first on the Latin American acquisition, as you saw, we just closed all five countries and the last countries we’re done actually still this week. So, we’re very pleased with that. What will happen in terms of the consolidation process is that we will look to a consolidation really in 2012. So in 2011 this will be probably just one number that we will show.

I think at this stage it’s a bit too early to give you any specific indications. What – I think you can say is that the nature of the business should allow us to recognize quite quickly in BAP, because these are short-term products. And so that should be indeed a significant contribution to BAP, as well as new business value. And then when we’re ready we will give you the numbers.

With regards to the new money yield, we’re currently reinvesting; and as you know, we have both life and non-life. So the average yield right now is around indeed the 3.8%.

Brian Shea – Bank of America/Merrill Lynch

Okay. Thank you for that. That does – how...

Debra Broek

Sorry, Brian, my mistake. I indeed I thought it was also high. I’m giving you the running yield, now the new investments yield on new money is actually around 3%.

Brian Shea – Bank of America/Merrill Lynch

Okay. Do you have it split out by Life and non-Life?

Debra Broek

Yes, we do, it’s a 2.5% in non-Life and 3.4% in Life.

Brian Shea – Bank of America/Merrill Lynch

Okay. Perfect.

Debra Broek

– not running.

Brian Shea – Bank of America/Merrill Lynch

Okay. Great. Thank you.

Debra Broek

Welcome.

Operator

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

Andrew Ritchie – Autonomous Research

Two questions, could you tell us on the Solvency I update you provided you’re accruing the dividend on the SST ratio. Can you tell us are you accruing the flat dividend in that number as well in the same way you used to do with your economic capital ratio?

Second question, actually wanted to revisit Germany again, I mean you described the reserving as one-off, but it’s being a consistent issue, obviously not as much this year, but it was an issue last year, to do it after-tax and can you tell us any other sort of reassurance that this won’t continue to drag several quarters. What’s happened there is a sovereignty issue, frequency issue, any sort of other color on that will be helpful? Thanks.

Debra Broek

Okay. Certainly I’ll be keen to answer that. First question, I think was the whether the SST ratio also included that accrued dividend, which in principal it does, so it’s not difference on Solvency I. And the on the second question, which was about the results, I think we – specifically what we had and I think was already flagged it indeed a preliminary, we increased the reserves on the architects and hospitals and that was already in 2011 based on the preliminary estimate.

What we have done is we even via now this, which then leads to this further reserve increase, so that’s what I meant by saying this was specifically should be one of. I am not sure what you exactly referring to with regard to reserve increases specifically in Germany last year.

Andrew Ritchie – Autonomous Research

Sorry. It’s actually earlier, it was in last year and second half of last year as well I think.

Debra Broek

Okay.

Andrew Ritchie – Autonomous Research

So on this issue, on the same class of business, right?

Debra Broek

So it’s my confusion.

Andrew Ritchie – Autonomous Research

Just to be clear, what you are saying is that – okay, reserving it was less service started 12 months ago, because it looks like the German combined ratio start to pick up from second half. It was initial reserve and then in the final additional more thorough analysis of the issue and that’s what we are saying in this quarter, is that how I should think about it?

Debra Broek

That’s how you should see it indeed, sorry, I thought it was earlier this year, but actually it was last year, so I got mixed up with the time.

Andrew Ritchie – Autonomous Research

And Andrea on the back on the SST, is it still a good rule of thumb to take the SST and divide it by 1.8 to give us an idea of what your kind of internal old economics obviously number would be?

Debra Broek

It does work as a general rule of thumb, yes. We haven’t made any significant changes to see the model.

Andrew Ritchie – Autonomous Research

Okay.

Debra Broek

I should also take you – and remind you this is still provision of approval from FINMA, so there the final approval as with many other Swiss companies is more probably going to take place in 2012.

Andrew Ritchie – Autonomous Research

Okay. Thank you.

Operator

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

Andy Broadfield – Barclays Capital

Hi, there. Two questions I guess, summing up to couple of reinsurance cost later. But the first question just remind me what the Farmers’ surplus ratio what the sort of ranges do they try to run that, I’m just thinking quota share has been taken down as suggest, but it’s a tougher world out there. And I’m just wondering what point you would stop considering presumably taking or potential offerings some more quota share capacity if that surplus goes down?

Second question is the strong performance in the U.K. Corporate Pensions – Corporate Pensions, but I think that’s predominantly in the U.K. at performance, I was just interested is Zurich paying commissions on that and I guess to question to rise also we’ve seen from weaker performance in the U.K. for those that didn’t pay commission value as for RDR into 2012. Can you just let me know, are you paying commission and if so, what the transition period might be to fulfill moving that and tends to the new approach and what you might consider to be the impact on growth and margin there?

Debra Broek

Okay. So, to your first question about the surplus ratio of the exchanges, back in 2009 I believe but the point is when Farmers presented at the Investor Day, they indicated that the target range for the surplus ratio of the exchanges was in the 32% to 40% range. So, I think, you need to put therefore the 36% that we have at Q3 in context of that rate.

With regard to the Corporate Life & Pension, this is basically a growth that we are very pleased with that is happening not only in the U.K., but actually also internationally. We are using consultants and we do not take commissions with regards to moving further.

Andy Broadfield – Barclays Capital

Exactly. Do not pay commissions. And can you just tell me roughly how much is in the U.K, it is split out in that way internally?

Debra Broek

I didn’t understand the question...

Andy Broadfield – Barclays Capital

How much of the corporate pension business is coming out of the U.K. and how much of this sort of from international?

Debra Broek

I think this is detail question, so IR will get back to you on that question.

Andy Broadfield – Barclays Capital

Fine that’s okay. Thanks so much.

Operator

Next question from Farooq Hanif from Morgan Stanley. Please go ahead, sir.

Farooq Hanif – Morgan Stanley

Hi, there. Just want to go back on the question on your money rights in the non-life business particularly. Could you remind us what’s kind of the duration and the proportion of assets been reinvested every year, should I get an idea of how to model that in numbers, three months with that?

And secondly, on the hedging gains and losses you had. Can you give us a little bit more detail on what came from where, and what might have change in your hedging policy in the fourth quarter, so that we can take that into account looking at market movements in the quarter-to-date just an idea of what are the kind of one-off affects you might be looking at? Thank you.

Debra Broek

Okay. So with regards to the new management yield, we basically have a duration of about 3.4% in General Insurance and seven-year in Global Life. As you know, we manage our assets with regards to our liabilities and we work around matching these within given guidelines. So the portfolios tend to be relatively stable. Of course, we may change that over time, but that has been relatively stable over time. So this is a duration, not to also mixed up with average insurance and which more five and seven plus.

With regards to the hedges, the principle around the hedges is to protect the balance sheet. And so what you are seeing really in this quarter is that because markets have been very volatile, you are seeing gains being realized which is offsetting the drop in equity, for example, equity hedges. Some of these hedges are actually relatively old.

The one with regards (inaudible), the destination portfolio which has a zero net income impact, actually has been put in place all the way back in March 2010. The hedge that we have on our U.K. Life operations has been in place for quite a while. The only one that’s relatively recent is indeed the hedge on the euro stocks equity where we have indeed are looking it into what we may be doing with that given the developments in the markets, and as and when we change that that will be disclosed if material.

Farooq Hanif – Morgan Stanley

Maybe if I could just last, I mean, in these hedges, do you also have – have you also sold upside, I mean what we see, is there a risk of reversal as markets improve and what is the further kind of gains that you get it markets for, just give us an idea, I guess in shape of it?

Debra Broek

So absolutely. That – because of the nature these markets improved, our equity will increase, but then you would see a partial reversal of that with regard to market movement. I forgot to mention one other hedge, which was actually protect our German life book against lower interest rates. So we’ll also thought while ago some swaps and the impact of that would also be reversed, if interest rates were to rise again. But that’s generally good news for us, interest rates rising. So we’d be quite happy about that.

Farooq Hanif – Morgan Stanley

Okay. Thank you. I might just call afterwards to get a bit more detail. But thank you very much.

Operator

Next question is from (inaudible), Kepler. Please go ahead.

Unidentified Analyst

Hi. Good afternoon altogether. I have two questions please. The first one is about the claims, the charges it’s pretty material to 800 million more claim. The frequency is pretty high, and so my question is, is it already enough to trigger a different stands towards reinsurance, will you go for more insurance coverage going forward?

And the second question is about the about the Thailand flood here, if I am not wrong looking at your reinsurance coverage, I think that you should have – now the question is first, does it enter into the global program as a claim and businesses like this, is it that you will have a first claim linked of 250, which is your attention on top of that, some 750 million coverage of sum reinsurance company and then on top of that you will face the claim on top of that, and of course first question if you are effected at all?

Debra Broek

Okay. Thank you for your question. So – I think there should be the structure of the reinsurance on page 11, which I believe is what you’re referring to, I know its half of our number. Okay, so we had it at half year. Our philosophy with regards to our reinsurance strategy compared to that, I don’t believe is meant to change. We may made some marginal adjustments to that structure, but this is structure that has worked well in the past, that actually is working also quite well this year. For example, the aggregate cover that we put in place is because of the high frequency is now entering into its end phase, we have booked actually in the third quarter, close to 50 million in reinsurance recoverable.

With regards to Thailand, I think it’s really early to give you an answer of how this can really pan out, so it’s really recent days and we’re evaluating, actually we are not sure we are even in a position to start evaluating other claims look like, because the areas are still flooded.

Unidentified Analyst

Sorry. In that case I was unprecise on formulating my question. Irrespective if you are affected or not or how big you are affected, is there insurance program that you have covering also Thailand?

Debra Broek

It should be covered in the international top layer because there is no exclusions.

Unidentified Analyst

No. It included 250 million as a first hit and then 750 protection and top of that all the rest at your charge, correct.

Debra Broek

Yeah. But what you have to understand whether the global aggregate got covered in euros already to the first 25 I think and therefore it’s not the international layer that you should look at but the global aggregate whether threshold is much lower.

Unidentified Analyst

Okay. Wonderful. Thank you.

Debra Broek

Welcome.

Operator

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

Stefan Schuermann – Bank Vontobel

Yes. I’ve two questions. First one is on the restructuring charges. You basically booked a non-life and life and if I not mistaken it’s like 134 million in Q3 for non-life and then 97 in life. Should we expect more to come here for the rest of the year?

And then the second question is basically on reserve releases. I think crossed 300 million in Q3. Could you maybe just give us some insight where the biggest movements happened? I mean we heard that Germany was basically accounted for 100 million negative. Where were the positive really coming from?

Debra Broek

So I will answer the reserve releases. First, look the reserves releases come from mainly across the board, yes, we do take a fresh view where we did see some strengthening expertise in this areas such as Germany as we mentioned as well as in the U.S. in workers’ comp.

Releases are really based on our reserve review, and we’re seeing our underwriting discipline continuing to point us and given some favorable development. The thing perhaps also important is that from a reserve margin perspective we believe these are – so there is no change at all in our reserving philosophy.

With regards to the restructuring charges, there are several in GI, particularly this is related to building our future strategy, which is a strategy that we’ve communicated earlier about reviewing re-underwriting and all the measures that we are taking in order to further combine ratio effective and more...

Stefan Schuermann – Bank Vontobel

Okay. But should we expect more to come here or...?

Debra Broek

I think our strategy is evolving and as we develop it, there could be some further restructuring charges, but it’s too early to give any.

Stefan Schuermann – Bank Vontobel

Okay. Thank you.

Operator

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

Michael Huttner – JPMorgan

Yes. I hope you can hear. I’m on my mobile. I (inaudible) probably my phone, so I – hope you can hear me. I’ve two questions. The first one is on the underlying loss ratio. That’s in your lovely workflow chart it was 64.2% at the six months and 64.4% at the nine months, so it was. And, I didn’t like that. I was thinking, hang on, you first accounted non-increases. So I’m just wondering what happened there and what should we expect to happen? In other words, was it to do with Germany or to me that was quite mysterious? The impression I had, if there was such a big improvements in the six months, it is almost as if what we’ve done that for the year and anymore would be for next year. So that was my first question.

And the second, is on the – so you reduced your exposure to Italy a bit, roughly from 7 to 6 billion, and I just wondered if you realized a loss during that, you have increased certain unrealized loss selling to Italy, so – and where would I see it in the accounts? Thank you.

Debra Broek

Okay. Well, Michael. Yes, we can hear you very well. Thank you. So, I hope you can also hear us, as remember our communications don’t necessarily work both ways.

Michael Huttner – JPMorgan

Thank you.

Debra Broek

With regard to the underlying loss ratio. So, if you look actually sideline that we indicate the total products, so, our underlying loss ratio in Q3 was 64.7%, certainly not as good as in Q2. I can assure you that GI is not resting on their lows. And, what really is triggering that, I think is two points. One is, I don’t think you can expect even in underlying ratios to stay flat and behave properly in a very, very regular line. There will be ups and downs.

The second is, as you thought, indeed there is some of the reserves and with some of the events in Germany that has been also affecting that ratio to the tune of around 0.4%, so that also has an impact. So, I think what’s really important is – keep in mind is that we were running at an underlying loss ratio of around 66% last year and we are now running at somewhere around 64%. And there is definitely more in store in terms of improving both the loss as well as the expense ratio in terms identified actions.

Michael Huttner – JPMorgan

Thank you.

Debra Broek

Second question was on Italy, so just to remember, we had 8 billion at the end of Q2 – dollars. With regards to Italy, we reduced that to $5.7 billion at the end of Q3. This is mostly due to an active reduction of our Italian exposure, and we did not incur any significant losses as we did that. And then most then of the variation that would be flowing from that point would be going through equity as these are available for sale securities.

Michael Huttner – JPMorgan

Just I understand for being the change in value of 5.7 would go to available for sale and you didn’t realize any significant loss – reduced acquisition.

Debra Broek

That is correct, because we did that more in the June, July period rather than the September period. So that was good timing.

Michael Huttner – JPMorgan

Okay. Perfect. Thanks very much.

Operator

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

Vinit Malhotra – Goldman Sachs

Yes. Hi. Actually we were also wondering about the underlying, but I think it’s being discussed. Just on the prices, you mentioned in your presentation that workers comp increased 9% in third quarter, just wanted to get that right whether now that is just like of getting claimed inflation in your view or is it, is that now going to flow in some form or the other in these underlying loss ratios?

And this is a broader question as well that, the continues price momentum last two quarters, in fact last three quarters positive price momentum in any fee is that at some point in your minds coming to – going to flow into this underlying level or not, having that said (inaudible) question? Thank you.

Debra Broek

Look the 9% is really as you know, we did take some reserves strengthening in the workers comp line. So the price increases reflect what we believe is necessary to write this business profitably and meet our return hurdles. As you know this is also a general philosophy that we write business so that we meet our hurdles and that is pretty much what we are doing across the Board. So the rate increases, we are taking is in order to achieve that together with the other writing rate actions.

As we take this rate increases, we obviously take into account expected claims inflation, which does vary from line-to-line and what we are seeing in workers’ comp is trends that are probably partially linked to the economic environment that are trending higher and this is why we are reacting and as you know, we’ve been reacting and as you know we’ve been reacting faster than the competition. I wish I could tell you, yes, we are increasing by 9, the current trends are completely flat, and we are going to make fantastic products, profits whether this is not the case where just writing to meet our product.

Vinit Malhotra – Goldman Sachs

Okay. Thanks very much.

Operator

Next question from Mr. Michael Klien from Nomura. Please go ahead.

Michael Klien – Nomura

Yes. I had two questions, if I may. Firstly on the high amount of realized gains that came through in the P&L. I think the gross amount or the number was about 1.6 billion and about 1.1 billion attributable to shareholders.

And now my question is how much of this come through the bottom line or go through in to, earnings is about 730. Am I right in this number? And if yes, how would this splits in terms of the various areas of the realizations gain or in other words are there some of the hedging that you do is not perfect in terms of movements on the derivatives on the hedges going through the P&L not being perfectly offset by the other side?

And my second question is, may be little bit less important, but I saw in the Swiss business on the Life Insurance side may strong growth, could you give a little bit indication, where it was primarily coming from? Thank you.

Debra Broek

So, it was a long question. I think I cut the one on the realized gain. I would appreciate, if you could repeat your question on the Swiss business?

Michael Klien – Nomura

Basically, on the Swiss business, if you look at the APE numbers they’re up something like 44% and the new business value is up even stronger year-by-year so I am just wondering which products has been driving this and how the profitability has changed?

Debra Broek

Okay. Right, so first of all on the realized gains your assumption of the 1 billion being about 700 million to the bottom-line is actually a very good estimate. You have a reconciliation table from BOP to NIAT which gives you that detail. What you have to take into account then as you move from your BOP to your NIAT it’s on page 20 of the financial supplement, is you have the 720 million is the portion of the capital gains and do flow through the bottom-line and then there are some restructuring and similar adjustments that are also negatively impacted and then of course you’ve got the tax which then gets you back to the 1.2 billion.

And then you can look at how this impacts this from the lines, so the realized gains is mostly in Life where you got 384 and the other is the other operating business 260. This one is linked to a realization of gains because some of the hedges are held centrally. And then there is some smaller gains in GI and very small ones in non-core businesses.

With regards to the Swiss business, this is primarily driven by Corporate Life and Pensions. So as you know that goes back to my earlier comment, that we are very pleased with the progress we are making and this is a product where we’ve got a very strong proposition which allows us to earn business in Switzerland in the U.K as well as in the emerging markets.

Michael Klien – Nomura

And I guess – and in Switzerland that still your Rita collective foundation right?

Debra Broek

Yes. We still that foundation indeed.

Michael Klien – Nomura

Okay. Thank you.

Operator

Next question from Mr. Atanasio Pantarrotas from Cheuvreux. Please go ahead.

Atanasio Pantarrotas – Cheuvreux

Yes, good afternoon to everybody. I have two questions left. I would like to have some color on loss inflation trend in your – in your U.S. Commercial Lines business you mentioned some details regarding the Worker’s Compensation business we would like to have some overall picture of your net North American Commercial business?

My second question, if you can provide us some details regarding the deferred acquisition cost in your Life business the variation during the first nine months as well the other items in Life business spreading profit in nine months also? Thanks.

Martin Senn

Okay. Loss inflation trends – I think the Worker’s Compensation is really the one that we’re seeing the most. I think general liability we’re still seeing some very live trends. This is something we’re watching very carefully though. Otherwise property that’s really car repairs, some repairs nothing very special there.

With regard to DAC one thing that I think it’s worth highlighting is that the U.K. licenses has been affected indeed due to the fact that there’s mostly unit-linked business, and that as equity markets went down, that has a negative impact on the DAC amortization. This however, is offset not in BAP, but in and by a hedge that we had put in place. So again, economically that reduction is offset, but it does not show in to the accounts. And that’s an impact of about 50 million.

Atanasio Pantarrotas – Cheuvreux

In nine months, right?

Martin Senn

Yeah.

Atanasio Pantarrotas – Cheuvreux

Okay. Thank you.

Operator

Next question from Mr. (inaudible) from RBC Capital Markets. Please go ahead sir.

Unidentified Analyst

Good afternoon. I have two questions please. The first one relates to the small charge you took in connection with your covered – conversion of your books from German GAAP to IFRS.

Can you give us a bit more background here for us to understand the context of how the mistake came to light? And I’m curious to see what the next part be a broader process, Pierre that you put in place coming in as a new CFO, and whether is a risk of uncovering single errors in other business units.

And the second question has to do with your North American commercial business. I note in the video presentation that you alluded to the weakness in the construction and auto sectors to explain the lack of momentum in premium growth, for instance, in North American Commercial.

But frankly, it’s been a number of years now, those two industry sectors has been experiencing very significant pressure, and our understanding were big for Zurich back in 2007, but by now when you would expect to have gain share in other industries. So, can you give us bit more color as to what’s being done to reduce your reliance on those industry sectors in North America?

Debra Broek

Okay. So first to your first question, HGB to IFRS, what will happen is that we uncover some areas in the conversion of our books from German GAAP i.e., HGB to IFRS which affected a variety of our loss reserves, unearned premium reserve and for acquisition cost. This was however, purely on very specific product what we restated prior period.

So the things that you need to keep in mind is, first of all, that HGB and IFRS are probably among the most different accounting treatments or conventions and therefore, there are more adjustments than in other. Other one to remember is that this is very specific to complex products. So as a result, we see this as being rather a unique event. Frankly, you’re giving me too much credit for having identified and corrected this. However, I think it’s important to note this is something that was uncovered by management and we correct the entries as we uncover them in the interest of transparency and being open.

Unidentified Analyst

Thank you. And on the other question regarding North America ....?

Debra Broek

The other question on refinancing, construction and automotive, look obviously we do our best in terms of moving the business. You have to keep in mind, we’re one of the major insurance companies in the U.S. Actually we will be – UNA will be 100 years old next year and we have been there a long time. We obviously tried to develop the business and have also a very developed relationships in many other sectors and our book of business will evolve as the economy is and where we see opportunities.

Unidentified Analyst

Okay. Thank you.

Operator

Next question is from Mr. Paul Bradley from Citigroup. Please go ahead, sir.

Paul Bradley – Citigroup

Hi, just quick question on performance operatings. I wonder, if you could tell us what sort of unrealized losses you’re carrying to each of the countries? And how much of that goes through to hit the shareholder’s equity and how much is absorbed by policyholders?

Martin Senn

Would you repeat the question? I’m not sure I understood it very well.

Paul Bradley – Citigroup

Sorry, with your government bond exposures to Italy, Spain, Portugal and the like, could you give us some idea of what sort of level of unrealized losses you’re currently carrying on these holdings? And of that how much of that goes straight to shareholder’s equity and how much is absorbed by policyholders sort of underway?

Martin Senn

So these perishable bonds, there are some details on page 52, but in essence these ones are available for sale. So the variation in the market value will flow through equity, will not flow through P&L, it will only flows to P&L as we sell these bonds.

Paul Bradley – Citigroup

Yes.

Martin Senn

And being available for sales are therefore mark-to-markets, so the market that value that we have in our books reflects than the market value that we had at the end of September.

So – and I think you can not at this point in time certain to what is the proportion that goes to shareholders or policyholders. That depends on how the book develops. The only thing I can say is that with regards to views on government and supranational, the split is, we have 28% in General Insurance and about 70% in Global Life.

Paul Bradley – Citigroup

Okay. And the market value you disclosed, how do that compare to the book values of the bonds, and some of the cost of bonds.

Martin Senn

So, you have some more details on the slide 52 of the nine months results if you would like to have a breakdown per country.

Paul Bradley – Citigroup

Okay. Thank you.

Martin Senn

Did you have another question, or was that now fair enough?

Operator

We will take the next question from Martin Vézina from ING. Please go ahead.

Martin Vézina – ING

Yes. Good afternoon, gentlemen. Two questions also from my side. First is also on European peripheral debt. Would you be able to comment on your European peripheral strategy in the fourth quarter? And should we suggest the acquisitions have remained stable into the fourth quarter since. During the second quarter results, you mentioned you have lowered your Italian exposures into the third quarter already. And that’s my first question.

The second is more or less a follow-up on the previous one, but then on the subordinated bank bonds of $3 billion. That all those small trenches I got from the video call which is good obviously, would you be able to comment on unrealized revaluation reserve that this attached to these subordinated bank bonds, so we can see more or less at what value they’re trading right now. That’s it. Thanks.

Debra Broek

Okay. Just to keep things in context. Just – well, like as a reminder, our exposure to the GIPS Country is 12 billion, which is about 6% of our total investment. So it’s relatively limited. And we got most of it in Italy and Spain. The strategy I think will really depend on the risk return. As I mentioned, we’ve got a disciplined approach. We look at – we have a certain appetite for some risks and then we look at the relative risk return that we have.

I mean ultimately, we have 200 billion, we must invest them somewhere and where we look at is where we believe we’ve got an appropriate risk return strategy. The principals also are not going to change. It will remain stable, i.e., that we have a disciplined A&M approach and that we will keep a high quality to our portfolio, and we will keep it diversified.

In the end, we think this is the best way of protecting our risks. You see it, for example, indeed in our subordinated debt exposure where it is really split between many counterparties. As a general principle, the lower we get into the credit rating, the lower the amount per single counterparty, so that we minimize any big risk.

So what we will do in the fourth quarter; we’ll see whether markets develop and we’ll adjust the portfolio as – where we will adjust the portfolios where we see the best risk return profile. I think it’s extremely difficult especially in those volatile markets to predict. Wish I had a crystal ball, but yeah – wish also you had a crystal ball unfortunately we don’t.

Martin Vézina – ING

Yeah somewhat agree with it. And may be – well its right to assume that the unrealized REVO attached to the subordinated bank bonds is rather substantially negative I would say though?

Debra Broek

I don’t have that number with me. So, you can – I would suggest you go to IR and ask for clarification on that.

Martin Vézina – ING

Okay. Great thanks for the answers, really helpful.

Martin Senn

Important thing is the market price is already reflected in our equity number.

Debra Broek

Okay. We’ll take one more question then.

Operator

Next question Mr. René Locher from MainFirst. Please go ahead sir.

René Locher – MainFirst

Yes good afternoon. Well, just a follow-up question on Italy and Spain. I mean just wondering are you forced – no it can be other way around. I mean you have still quite a substantial amount Italian bonds in Q3, now I’m wondering what kind of investment do you use in all the assets the balance sheet to match Italian liabilities or again are you forced by Italian or Spanish insurance low to hold Italian or Spanish bonds, or could you have an interest in euro, you could just sell all Italian, Spanish bonds and reinvest them only in German bonds. So, that’s I might believe it (inaudible) but I am just wondering is that good work?

And then second question I was a little too aggressive on these unrealized capital gains reflected in equity, so perhaps if you could give me and how much of that was the covered bond portfolio that appreciation then how much was negative on credit spreads and how much was the equity portfolio evaluation? Thank you.

René Locher – MainFirst

Okay. Thank you, René. And so on the Italian bond, I think, the few principles. We of course comply with the local regulations and laws. Our principle is that we match domestic assets and liability not completely in the specific case of Italy, our liabilities are actually greater than our – then the amount of Italian bonds we have. I mean, generally speaking, if we do go towards the mismatch then it would go towards moving to a higher quality of assets in that regard.

With regards to the unrealized gain, there were several impact, I mean, broadly speaking what we did see is an increase in the unrealized gains on the government bond portfolio, which was partially offset by a decline in equities. And there is also some impact on the increasing credit spreads. But the two big movers are really the government bond increase and the lower equities.

René Locher – MainFirst

Could you give me a figure or I can get in touch with IR, if that’s okay.

Debra Broek

You can get the details from IR.

René Locher – MainFirst

Yeah, that’s fine. Thank you very much.

Debra Broek

Okay. I think then that concludes our Q&A time. And I will turn it back over to Martin and for closing remarks.

Martin Senn

Thank you very much Debra and thank you very much Pierre. Also thank you to everybody calling in for joining us today. The aspect has been I would say solid performance in a challenging environment, which will leave us well positioned for the future. And I must say I feel good about the strong result and I also feel very good about the strong growth we have in net income.

What is very important and I think some of the question have been alluding to us remains focused, disciplined in everything we do and particularly I take the last question with regard to management activities. We got to keep calm hands here, not trying to be influenced by mark-to-market. Our strategy in investment management is very clear and straight forward. We manage assets as well as liabilities.

We do that on a very constructed basis. If the risk reward ratio is changed then we act but we always act in a way where we keep the overall balance of the portfolio in place and with that as well get maximum diversification benefits and that is really key and that’s what has basically helped our diversity and the financial crisis has broken out and this will help us as well, no matter where the current price is leading to.

So we continue to expand our presence and size in fast growing, emerging markets. With that we also maintain a strong position in material markets. And probably most importantly and I here tie back to what they have talked before in these days and these times our capital insolvency position has to remain strong and that is also the basis of hedging given whenever they are necessary.

And with that I hope to see you all at our Investor Day in early December. It’s on December 1. I hope you have all saved the date and I would like to thank you again for joining us today. I wish you a good day and good luck in the markets. Thank you very much.

Debra Broek

Thank you.

Operator

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

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