Zurich Financial Services' CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: Zurich Fincl (ZFSVY)

Zurich Financial Services Ltd. (OTC:ZFSVY) Q4 2011 Earnings Conference Call February 16, 2012 4:30 AM ET


Debra Broek – Head, IR

Martin Senn – CEO

Pierre Wauthier – CFO


René Locher – MainFirst

Spencer Horgan – Deutsche Bank

Farooq Hanif – Morgan Stanley

Fabrizio Croce – Kepler

Andy Broadfield – Barclays Capital

Brian Shea – Bank of America Merrill Lynch

Andrew Ritchie – Autonomous

Michael Huttner – JPMorgan

Debra Broek

Good morning, everyone. Welcome to Zurich and welcome to Zurich Financial Services Annual Results Reporting for 2011. Just a friendly reminder to please turnoff your mobile phones or other gadgets that you might have with you, so we’re not disrupting the presentation or the Q&A time.

And it’s my pleasure then to turn it over to our CEO, Martin Senn. Martin.

Martin Senn

Thank you very much, Debra, and good morning, ladies and gentlemen. Today we are proud to present to you our annual results for 2011 showing good profitability despite unprecedented level of catastrophe and weather-related losses and despite a very challenging market environment.

We continue to generate strong cash flows. We have a strong capital base and solvency position. We are growing where we want to grow and thanks to our resilient performance in 2011 and the continuing execution of our strategy, we are well positioned to outperform in a challenging environment. And this gives us the confidence to maintain our dividend at CHF17 per share which is, as the dividend payment will be paid from the capital contribution reserve, exempt from Swiss withholding tax.

Now, let me give you some highlights before my colleague, Pierre Wauthier, explains these numbers in more and in greater detail. Business operating profit was $4.3 billion, a decline of 12%, while net income after tax attributable to shareholders was $3.8 billion, 10% higher than in 2010. These are strong numbers in a year characterized by a challenging global economic environment and an exceptionally high level of catastrophe losses and weather-related losses. Industry-wide, these losses were more than twice the level seen in 2010 and more than three times the average of the last 10 years. We have also benefited from strong risk management actions and gains from investments including the sale of part of the Group’s stake in New China Life Insurance.

Despite the challenging environment in which we are operating, our return on equity was close to 12% and our business operating profit after tax return on equity came in at 10.2%, reflecting the impact of the exceptionally high level of catastrophe and weather-related losses.

Our underlying businesses continue to perform well and to execute on their strategies with solid improvements in their underlying performance and continued focus on driving growth and value in Global Life and Farmers and in General Insurance, achieving selected growth in those areas where we can do so profitably.

In General Insurance, efficiency enhancements and robust underwriting actions reflecting our sustained focus on profitability produced a strong 2 percentage point improvement in our underlying loss ratio. And the exceptional frequency and overall severity of catastrophe and significant weather-related losses nevertheless impacted the combined ratio, which deteriorated to 98.8%.

Our Global Life business continued to grow new business value in certain mature markets and particularly in emerging markets. And this is in line with our objectives and we expect this trend to continue as we embed our acquisition in Malaysia and as well the alliance with Banco Santander in Latin America.

Meanwhile, Farmers delivered growth in premiums in all continued business lines, except for homeowners. The growth momentum accelerated through the year as Farmers continued to execute on its multichannel and multi-brand strategy, building the strength of its brands and expanding its customer reach.

As to our capital position, shareholders’ equity remained stable at broadly the same level as of December 31st in 2010 after recording the total cost of paying $2.7 billion of dividends in 2011. The strength of this performance is what gives us the confidence to pay such an attractive dividend.

And this slide shows our dividend history, including the proposed dividend of CHF17 for 2011. As you know, the dividend is subject to shareholder approval at our Annual General Meeting on March 29. Our policy is to pay an attractive and sustainable dividend, and the proposed dividend reflects both our strong performance and our continuing confidence in our strategy which has helped us to deliver profits in every quarter since the current economic crisis began, and in fact since 2002. We are successfully managing the current volatility and we are prepared for the challenges ahead.

Our continued focus on financial and underwriting discipline and the effective execution of our strategy has enabled us to deliver strong results and to continue to generate strong cash flows from which we can sustain an attractive dividend. We are on track to deliver our targets by 2013. Our capital and solvency positions remain strong and we have a strong platform from which to grow our business selectively in mature markets and into high-growth markets.

In 2011, we were able to selectively capture growth through our alliance with Banco Santander in Latin America and our acquisition in Malaysia as well as through the renewal of our distribution agreement in Germany and Italy with Deutsche Bank.

We will continue to seek out new opportunities to grow our business through acquisitions, joint ventures and alliances. And we will strive for organic growth by improving our customer proposition, reviewing our product portfolio, using technology to know our customers better and by investing in our people, our processes and our systems.

But this growth will never come at the cost of the financial and underwriting discipline.

We are managing the present with confidence and we are leveraging our strong position to prepare for the future. We believe that in markets like these our strength is a critical advantage in capturing new opportunities. And we have clear criteria and are committed to acting on opportunities that meet these criteria and we will do this as usual “The Zurich Way,” with discipline and with focus. And in recognition of this and the fact that Zurich has now been focused on insurance for several years, our Board of Directors will propose changing our name from Zurich Financial Services to Zurich Insurance Group at our Annual General Meeting on March 29.

Our results for 2011 show that our strategy is working and as we highlighted at our Investor’s Day in December, we are confident on how to further build on this growth momentum.

And on that note, I would like to ask my colleague, Pierre, to talk you through last year’s business performance in much more detail. Thank you very much. Enjoy the presentation, Pierre.

Pierre Wauthier

Well, thank you, Martin, and good morning, ladies and gentlemen. I am pleased to present the year-end results for the Group. During 2011, we have progressed towards our targets and continued our underwriting discipline, while growing selectively in mature markets and continuing to expand in high-growth markets. This has been an exceptional year, hit with the worst catastrophes and weather events recorded of over $105 billion. Our customers have suffered enormously as they were hit by floods, earthquakes and tornadoes. But this is our business, so we have been very proactive managing claims and delivering when it mattered to our customers.

2011 has also been a year of increased market volatility and volatile credit spreads, as well as continued low interest rates, particularly in the Euro zone as you know. We have weathered the storm well. Thanks to our risk-based approach to managing our assets relative to our liabilities.

Now turning to the fourth quarter, our business operating profit of $1 billion declined compared to last year, as we recognized losses from the Thailand floods of $275 million, as well as further losses from the New Zealand earthquakes of $80 million. We benefitted however from our global aggregate reinsurance recovery in the amount of a $130 million. The net effect of all these was a reduction of $225 million on our fourth quarter results. In addition, the fourth quarter net income attributable to shareholders of $557 million on the lower chart, reflects mark-to-market adjustments as well as a higher tax rate and an accrual for current and future charitable contributions of $100 million pre-tax, reflecting our commitment to society. We have progressed on our announced expense target of $500 million for the Group by 2013, achieving over $100 million of run rate direct expense savings from mature markets.

Finally, let me clarify what has been included in the year-end accounts and in particular with regards to the more recent acquisitions. We have first fully consolidated Malaysia in the fourth quarter and as such, recognized $9 million in net income for 2011. For Santander, we had included preliminary estimates of $15.6 billion on the asset side and $13.2 billion on the liability side with $1.1 billion recognized in non-controlling interest and the remainder $1.2 billion reflecting the net purchase price. There is no impact to the P&L itself in 2011, where we will provide more details of the transaction when it has been fully consolidated later in the year 2012.

Now, let’s have a look at the results by segments. In General Insurance, we have further progressed on executing on our targets with the results of portfolio management actions and continued rate increases, reflected in the improved underlying loss ratio, which I’ll detail a bit later. This improvement however was more than offset by the extraordinary frequency and overall severity of major CAT and weather-related claims, events throughout 2011, resulting in the business operating profit of $2.3 billion.

Global Life reported the business operating profit of $1.4 billion, down 14% in local currency. Increased fee income from the higher average assets under management and higher risk margins from the focus on protection business were more than offset by the continuing investment in the business as well as lower stock market levels and the lower benefit from special operating items compared to the prior 2010.

The decline in the business operating profit of Farmers to $1.5 billion is entirely due to Farmers Re. It reflects the lower average All Lines Quota Share treaty participation to 12% and an unfavorable underwriting result, giving the extraordinary high amount of CAT losses at the Farmers Exchanges. Farmers Management Services however posted a small increase in business operating profit, as slightly lower management fees were more than compensated by lower expenses as well as lower 21st Century integration costs.

Other operating businesses increased compared to last year, reflecting the strong Swiss Franc and the effect of positive one-off items in 2010. Noncore businesses reported however an improved result, as this year loan provisions were significantly lower than last year in our banking business. We also experienced lower than expected claims incidents and relative outperformance of our assets relative to our liabilities in the centers disability portfolio. For our UK and Irish property loan books, we continued to focus on running down the book and we have already made good progress in 2011 with loan redemptions of $375 million or 16% of the total loan book. During 2011, we also made very good progress on unlocking capital from the non-core operations, leading to the regulatory capital release of about $800 million in 2011.

So now let’s turn to the detailed results by segment. And before we go into the General Insurance numbers, let me set the scene for these results. First, 2011 was the costliest year in terms of catastrophes and weather-related events. Second, General Insurance continues to face a subdued macroeconomic environment that is characterized by low GDP growth or even recession in material markets, as well as low yields in those countries. And third, we continue to successful execute on our combined ratio improvement targets. With that in mind, let’s have a closer look at the numbers.

The impact of major catastrophes, particularly in Asia Pacific, in the first and fourth quarter and larger losses such as the tornadoes in the US in the second quarter or Hurricane Irene, as well as hailstorms in Europe, resulted in major CAT and large losses of the reinsurance being about $800 million compared to last year. This was partially offset by the portfolio management actions and rate increases taking hold, and improving the underlying loss ratio by 2 points and contributing almost $600 million to the underwriting result. The extraordinary frequency and overall severity of the loss events in 2011 has been mitigated partially by the full use of a global aggregate CAT cover. After booking an estimated recovery of about $45 million in the third quarter, we booked a further $138 million in the fourth quarter. Taking prior developments into account as well, the reported combined ratio increased as a result by 0.9 points to 98.8.

We highlighted in the third quarter that result in Germany had been affected by a number of issues. As a consequence, we have undertaken a deeper review of the Germany portfolios and therefore in the fourth quarter, we have further strengthened reserves by about $120 million, including special line such as architect liabilities. In addition, Germany saw some higher larger losses in Q4 and an increase in the hailstorm losses which further added about $30 million in the fourth quarter. Germany remains an area of management focus of course, but we feel comfortable at this stage with reserve position and we believe that the comprehensive set of management, underwriting and pricing actions which are implementing will restore the profitability of this book.

As Mario already showed at our Investor Day last December, the implementation of our General Insurance strategy is continuing to show results. Our stance on pricing and underwriting discipline is unchanged and rates continued to go up with a rate increase of 3.5% for the year, a further small increase over the nine months, which were at 3.4%. Portfolio management actions to ensure adequate levels of profitability continue to be implemented. Nevertheless, gross written premiums are flat in local currency in the full year, while showing a small increase in the fourth quarter of 1%.

Now, let’s have a look at the rate development on the next slide. We continued to push rate and portfolio reshaping actions in a balanced way to drive profitability. As said before, General Insurance rates increased on average 3.5% in 2011. Let me remind you here that this average rate increase comes on top of similar increases over the last three years and therefore has a compounding effect. In the fourth quarter, we saw some further acceleration of rate increases in Global Corporate North America and in certain lines in North America Commercial. So let’s look now at the individual rate actions in our various market units in more detail.

So Global Corporate, as you can see, achieved rate increase of 3% in 2011, as well as higher customer retention. North America Commercial has confirmed its trend of a strong rate increases with 4% in the fourth quarter. All major lines of business show rate increases and workers’ compensation continues to lead with an increase of about 8% in the fourth quarter. In addition, and in line with Global Corporate North America, we see even higher rate increases in the motor and property alliance in the fourth quarter compared to the third. Overall, we consider this to be really good result in a highly competitive market.

Let’s now turn to Europe. Rate increases in European personal lines have continued to stay similarly high as in the past two years, driven by the UK and Italy. In both, the UK and Italy personal lines motor books, these rate increases continue to improve the accident year loss ratio, further confirming the trend from the nine month and thus demonstrating that our actions show through intangible results. Commercial lines in Europe saw a similar rate increases as the nine months. Overall, increases continued to be at healthy level and helped to support the profitability of these portfolios.

Now, let’s move on to premiums which is the lower chart, which are driven not only by rates, but also underwriting and growth actions, retention, and new business performance. In Global Corporate, gross written premiums were flat in local currency, reflecting the net effect of all these actions. Global Corporate’s underwriting production however i.e. excluding captive and fronting business is strong, which is reflected in net earned premiums being up 2% in local currency for the year. In the US and Europe, the continued focus on profitable customer relationships led to an increase in a retention, and we continued our expansion in Asia and the Middle East.

In the fourth quarter, North America Commercial has seen an unusual increase in premiums from crop, which is driven by higher commodity prices as well as better harvests, leading to true-ups in the quarter. This contributed two-thirds of the 8% gross written premium increased in the fourth quarter, while continued selective growth in targeted areas of commercial markets, such as energy casualty, grow the remaining increase. This was the full-year top-line to a flat position after a reduction of 2% at the nine months, an encouraging result for the 2011, which was characterized by portfolio reshaping actions in the US.

Europe’s premiums overall reduced by 3% in local currency in the full year, even though we have achieved rate increases. The premium levels reflect the different economic environment in Europe as well as our targeted re-underwriting actions. As such, targeted actions in our personalized motor book in the UK and Italy explained about two-thirds of the decrease in the year, and we are seeing it bottoming out here as the rates of premium reductions is lowered. And overall for Europe, retention rates are up.

In terms of absolute amount, the premium reductions in Europe however were more than compensated by increases in international markets. Here, premiums continued to grow at 10% in local currency, specifically driven by growth in Latin America, by 21%. This increase is mostly due to motor and specialties business in Brazil, as well as motor in Argentina. In the region Middle East and Africa, premiums are slightly up despite re-underwriting actions taken in South Africa. Furthermore, Asia Pacific grew by 5% in local currency, mostly resulting from rate increases in Australia and growth in Japan.

Now, let’s look at the loss ratio components in more detail. And I will focus on the two charts on the left. Starting with the underlying ratio, it improved by 2 percentage points in the full year to 64.3%, consistent with our improvement in the nine months. As Mario explained at the December Investor Day, we continue to implement reshaping actions across the GI portfolio. As a result, the underwriting result for example of the 15 poorest performing portfolios improved by over $200 million versus the prior year. As such, we have refocused the US workers’ comp portfolio ahead of the market. We also shrunk some pieces in our North American portfolio that were not performing well, like US environmental and some excess casualty portfolios. In addition, we improved significantly the performance of personalized motor portfolio in the UK and Italy. We did this while growing selectively in targeted segments. These actions together with many others show that we’re progressing well on our journey to improve the risk return profile of our portfolio.

Now let’s continue looking at the loss ratio and its components. In the second column from the left, you see the prior year received or PYD on the chart, which amounted to $1.2 billion i.e. 4.2 percentage points over the loss ratio or about 2.3% of net loss reserves. This is about a $100 million than last year. These releases emerges from various regions and lines of business across our global portfolio and we believe that the overall reserve adequacy is unchanged year-over-year.

Global Corporate saw releases of about $400 million from both Europe and North America, while North America Commercial released about $450 million from various lines, including liability and financial lines. Europe saw net releases of about $200 million, which resulted primarily from the motor business in Switzerland, while most other countries reported small favorable amounts. In contrast, Germany reported reserve increases of over $200 million, taken in the third and fourth quarter, mainly in the medical and professional liability lines as I already mentioned.

Next, major CAT losses of $1 billion in total, including the fourth quarter, and as I already mentioned, the $275 million from the Thailand floods as well as the $80 million from earthquakes. If we now move on to large claims, 2011 was characterized by an extraordinary frequency and weather-related losses. In the second quarter, we spent $200 million or 0.7 percentage points of the loss ratio related to US tornadoes. And in the third quarter, we mentioned specifically the severe hailstorms in Switzerland and Germany alone added about a $130 million. Together, these weather-related events added 1.1 percentage points to the loss ratio. However, at this stage, we see no specific trend for large claims in terms of loss type allocation, and we believe that our risk and aggregation management is effective. As I already have mentioned these unusually high weather CAT losses have triggered the Group’s global aggregate CAT cover. We have separated this out in the estimated total recovery of a $175 million in this analysis, which contributed 0.6% in the combined loss ratio.

In summary, the overall reserve adequacy is unchanged, the underlying loss ratio continued to improve by 2 percentage points, rates and re-underwriting actions taken in previous quarters of further earning into the results. So overall, I think very encouraging moves going in the right directions.

Moving onto the next slide, let’s put the 2011 CAT and large claim events into perspective. So you can see in short, 2011 was a very heavy year for major CATs and large claims. The quarterly average of such claims over the past five years is now at 9%, which is up 1 percentage points from the average we showed last year, and this is of course due to the average for 2011, which is at 12.4% i.e. almost 3.5 percentage points above this five-year mean.

We continue to believe that the experience over the last quarters largely reflects the volatility peaks, which is worldwide events as I mentioned before with the highest insured losses ever encountered, and which are of course inherent in the global book covering large risks like ours, and we price such risks accordingly. In addition, we have not changed the structure of our reinsurance program, which proved to be adequate and effective in this extraordinary year.

Moving now from the loss to the expense ratio, overall over the year, the expense ratio stayed flat as we continued to manage expenses tightly. You will notice in the fourth quarter that the expense ratio ticked up by 1.8 points to 28.2%. More than half or about 1 point was really driven by one-off items such as asset write-offs and increased bad debt provisions from balance sheet reviews and higher reinsurance receivables as a result of high CAT and weather-related losses. In addition, there were seasonal patterns; for example, in bank amortization, as experienced in prior years. And we also continued to invest in our international markets.

Our focus on total spend is not only targeting other underwriting expenses, but is equally focused on loss adjustment expense and management cost reported also under non-technical expenses. And we continued to work on our overall expense base to achieve the ambitious cost cutting targets by year-end 2013. As announced at our December 2011 Investor Day, we are making good progress, and are starting to see reductions in direct expense in mature market of more than a $100 million while reinvesting in our international markets. And our continued drive to increase efficiency in the business is also reflected in a reduction of headcount by about 4% in mature markets.

Now, let’s turn over to Global Life. And here also, before we look at the numbers, I think it’s useful to place the Global Life results into context with the year that also provided many challenges as well as opportunities. First, 2011 was a significantly volatile year for financial markets. Most equity markets and interest rates grew significantly down over the 2010 levels. These declines weighed on results and although de-risking actions have gone someway to mitigate the economic impact, the market volatility continued to impact consumer appetite, to invest in unit linked and single premium products. We continue to adapt to these challenges by modifying product mix and successfully diversifying into the growth markets of Latin America and Asia Pacific, Middle East. Second, the tough competitive and economic landscape within Europe persisted particularly in Spain, Ireland, and Germany. Our pricing discipline in these markets will continue focusing on profitability over volume. And third, 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 indicator. Gross written premiums, policy fees and the insurance deposits remain flat at $27.7 billion, but decreased by 5% in local currency terms as growth mainly generated in the UK and Asia Pacific, Middle East, did not fully offset the reductions experienced in Spain, Ireland and Germany. Net inflows to assets under management remain positive at $2.8 billion, a good result considering the economic environment across Europe and the aforementioned pressure on single premium inflows. While reported new business value increased by 7% in local currency, it does include a refinement in our methodology for calculating new business value for the corporate risk business. Excluding this change, new business value reduced by 5% in local currency. This was primarily due to a reduction in Europe’s overall volume and margin and a change in persistency assumptions in North America.

As noted in my opening remarks to the slide, we have seen the combination of economic uncertainty, austerity measures and volatile financial markets, impacting consumer appetite and competitor pricing behavior, mainly in Ireland and Spain, as well as a reduction in the single premium market in Germany. To put this into context, the combined new business value in these countries has reduced by 20%. That said, we have continued to drive value growth within Europe in areas such as Corporate, Life, and Pensions in the UK and Switzerland and private client banking solutions in the UK. In addition, solid margins with APA [ph] growth in Latin America and Asia Pacific Middle East enables strong organic growth in new business value in these regions of 32% and 15% respectively. While the Corporate and Pensions pillar gained traction, particularly in Brazil and Mexico, Asia Pacific Middle East growth came from corporate savings and individual protection products.

Moving onto the Embedded Value. The Embedded Value operating earnings of $1.4 billion represent in an operating EV return of 8.5%. The return decreased 1.1 percentage points over the same period a year-ago, as the higher impact of new business and the expected emergence of value from the in-force was partially offset by expense and persistency variances. The closing MCV decreased by around $600 million to $15.8 billion. This was largely driven by dividends in the region of $580 million as the EV operating earnings of $1.4 billion were mainly offset by adverse economic variances of $1.3 billion.

I would also like to draw your attention at this point to a new disclosure highlighting our discounted risk neutral cash flows over the Life in-force business. It can be found in the appendix to this presentation as well as in the EV report. And you will see that about 57% of the Global Life VIF emerges in the first 10 years, reflecting the size of the longer tail book with our new business emphasis however being on a short payback high margin business.

Back to the slide, reported business operating profit decreased by 8% to $1.4 billion or 14% 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. I will go through this further in the profit by source slide.

Before I go there, let me go a little bit into the new business by pillar results. Within the bank distribution pillar, the new business value declined by 17% in local currency. While the volumes in Spain and Germany came under pressure, the new business margin improvement of 3.8 points to 28.8% helped reduce the impact to new business value, particularly in Spain. IFA/Brokers new business value decreased by 13% in local currency as volume growth in Latin America was more than offset by lower sales in Germany and the Irish domestic market.

Moreover, volumes reduced year-on-year in the cross-border business, manufactured in their European hub for Ireland, for distribution in Italy, where 2010 benefited from an Italian fiscal amnesty. Volume in the agent pillar decreased by 5% on a local currency basis 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 also the main contributor to reducing the pillar’s margin and therefore the new business value.

International and Expats new business volume grew by 5%, while new business value grew by 11% in local currency as the pillar leveraged key distribution capacity in the Middle East as well as improving with their new business margin by 1.5 percentage points. And then Corporates, Life and Pensions continued to consistently deliver growth in volume and value in most regions especially from business generated in the UK and Asia Pacific Middle East. Even excluding the corporate protection methodology refinement, new business value increased by 23% on a local currency basis over the same period a year-ago. As with the first three quarters of the year, the appetite for wealth solutions in the private banking sector in UK remained in the fourth quarter, allowing the continued placement of tranches of investment bonds through the banking partners in the UK.

So let’s now look at the Global Life business operating profit by source view. Global Life delivered a resilient operating profit of $1.4 billion, a good result in a difficult environment and continues to be well positioned to fund its gross new business cost and transformational spend from the in-force business. Looking at the margins in more detail, the business in-force expense margin of $1.4 billion decreased by 6% in local currency mainly as a result of higher operating expenses and transformational spend, which was partially mitigated by increases in policy charges due to an ongoing shift from traditional unit linked business in Germany.

The risk margin of $762 million improved by 16% in local currency, growing in line with our focus on writing, protection business, as well as a stable claims experience. The investment margin of $709 million decreased by 5% in local currency mainly as a result of the reducing investment yield and the divestment of the insurance operations of Caixa Sabadell in 2010. The gross new business trend of $1.5 billion decreased 8% in local currency, due to the reduction in broker commissions and the lower acquisition cost in the Corporate, Life and Pensions pillar. You can find more details in the appendix with regards to Global Life profit by source results by country.

We completed in the fourth quarter the 51% acquisition of Santander’s insurance operations in Latin America. So let me give you a few details about the performance of these operations in 2011. As you know, we closed the transaction in October and November of 2011. The initial purchase price of $1.67 billion has been adjusted down to $1.4 billion, mainly due to pre-closing dividends as well as FX movements. And you may notice when you look at the annual report that the cash pay was $1.2 billion. The difference relates to approximately $250 million of acquired debt which then reduces the net asset value of the transaction. This $1.2 billion was financed through $500 million subordinated debts that we issued in January of this year and the remainder from cash resources.

Turning now to the financial information, the cash dividends paid post closing in 2011 were approximately $224 million on a 100% basis, clearly supporting the free cash flow generation of the Group going forward. There has been a good positive development on gross written premium with a compound annual growth rate of 17% and a local statutory net income growth of 13.5% on a like-for-like basis, which is supported by the improvement in the combined ratio of about 2 percentage points to 83%, clearly demonstrating the earnings potential of the business. Now, remember that this is local statutory, so when we’ll consolidate it under IFRS, the net income number will change as it will among others include the amortization of intangibles. We will give more details of the performance of the joint venture later in the year when we’ve had the time to fully consolidate it, and we’ll start reporting on that in the first quarter.

Moving now on to our third business segment, Farmers. Here just also to give you a little bit of background, the US economy also went through a difficult year, even though there were signs of improvement in the last quarter with the unemployment rate falling and consumer confidence raising. While the US auto industry is seeing a recovery in demand, the situation of the housing market remains challenging with new home sales at persistent low levels. In addition, there were high catastrophes and weather-related losses also in the US. Against this background, Farmers continued to execute its multichannel and multi-brand strategy, resulting in an accelerating momentum of premium growth.

So let’s now turn to the figures. As already mentioned, the business operating profit dropped 12% to $1.5 billion, entirely due to Farmers Re, while the Farmers Management Services profit slightly increased. At Farmers Management Services, management fees and other related revenues in 2011 were slightly down to $2.8 billion. However, in the fourth quarter, there was an increase of 2% as a run-off of the 21st Century Agency Auto book gradually phased out during the year and the growth of the continued business gained momentum. Lower expenses and lower 21st Century duration cost over the year made up for their shortfall in management fees and other related revenues, then allowing for a slight increase in the business operating profit to $1.4 billion.

Business operating profit of Farmers Re in 2011 dropped $205 million to a $116 million. This reflects the reduction in the All Lines Quota Share treaty to 12% compared to an average of 30% in the previous year, as well as a 3.2 points deterioration in the combined ratio to a 100.8%, of which, 2.1 points are attributable to the higher cap losses. The gross written premium of the Farmers Exchanges which we manage but do not own, grew 1% to $18.3 billion in 2011. Adjusting for the run-off of the 21st Century Agency Auto book, growth was 1.5%. The growth momentum evident in the second and third quarter further accelerated in the fourth quarter was gross written premium increasing by 2.9%. The negative impact of run-off of the 21st Century Agency Auto book – it’s last time maybe I say this – which affected premium growth in previous quarter is finally gone.

Over the year, all continued lines of businesses experienced growth, except for homeowners which has to be seen in the context of the economic situation I mentioned before. While homeowners’ premiums were down 0.5% for the full year, they were up 1.4% in the fourth quarter. The fourth quarter was also particularly strong for the 21st Century Direct book with an increase in premium of 8.4%.

Moving onto the Farmers Exchanges combined ratio, it was a 106.4% for 2011, or 7.7 points higher than 2010. The deterioration is mainly driven by the loss ratio and reflects the high amount of CAT and weather-related claims, as well as unfavorable auto property and physical damage trends, both industry-wide and at the Farmers Exchanges. Counteracting rate and underwriting mitigating actions have been and continue to be taken. The increase in the expense ratio reflects to the strategic investments in Farmers branding, Eastern expansion, and 21st Century policy acquisition costs. The All Lines Quota Share treaty participation was increased from 12% to 20% as of December 31st, 2011, leaving the Farmers Exchanges surplus ratio at 38.1% at year-end. The strengthening of the surplus ratio compared to the 36.5% that we reported at the end of third quarter and is fully attributable to this increase in the quota share, which aims to maintain the solvency levels for each of the individual exchanges at the desired levels as well as keeping the combined surplus ratio in a range around 36% over the cycle therefore supporting Farmers growth ambitions going forward.

Moving now to investments. Financial markets, as already mentioned, were challenging in 2011, particularly as the Euro zone sovereign debt crisis continued to unfold. After a particularly volatile third quarter, government bonds yields – especially core government bond yields declined further in the fourth quarter, while the equity markets showed some recovery. Against this background, I’m very satisfied to report that we have achieved a total investment return of 5.4%, which is unchanged compared to the previous year. Net investment result which is included in net income grew by 17% to $9.4 billion, due to a higher realized capital gains compared to 2010.

Let’s look now the performance for our Group investments in a little more detail. Net investment income increased by 1% in dollar terms but is 4% on the local currency basis, mainly because maturing debt is reinvested in lower yields. Net capital gains more than doubled to $2.2 billion. The bulk of these capital gains were achieved in the third quarter by our derivatives positions used for hedging economic exposure as well as the sale of part of our stake in New China Life Insurance in the second quarter. And net capital gains in the fourth quarter were small.

It is well known that we use derivatives selectively to manage ALM market risks. In the fourth quarter, we took some losses on those derivatives, hedging our exposure to equity risks and some gains on those covering exposure to interest rate risk, the net effect being a loss of just over a $100 million. These derivative result should not be surprising during a quarter of recovering equity markets and the falling government yields. In line with our assessments of diminishing de-risk from the Euro zone, we also unwound our Euro stocks put options which we mentioned at our half year results. And this we did in the earlier part of the fourth quarter. As a result, our equity exposure increased to 3.2% compared to 2.7% at the end of September. This increase brings our equity exposure closer to our strategic assets allocation.

Finally, net unrealized gains increased by $1.1 billion in 2011. This increase was largely driven by gains on the government bond portfolio as yields fell, more than making up losses on equities, gain realizations on our bond portfolio and on the sale of part of our stake in New China Life Insurance. In the fourth quarter, our net unrealized gains increased slightly with gains on European core government bonds and equities mostly counter balanced by decline in the valuation of the European Union peripheral government bonds. In dollar terms, Group investments of a $194 billion, slightly down from the previous year level. However, on a local currency basis, they are up 1% given the impact of falling interest rate on the value of debt securities.

Now let’s move to shareholders’ equity. The balance sheet continues to be very strong with $31.6 billion in shareholders’ equity. Overall for the fourth quarter, equity decreased by approximately $200 million to the $31.6 billion I mentioned, with a benefit from the fourth quarter net income as well as the change in unrealized gains being offset by foreign currency movements and higher net actuarial losses on the Group’s Pension plan, mostly driven by the reference interest rates [Audio Gap]. As mentioned in the previous quarter, we file our SST ratio with FINMA half yearly. In line with this, our next filing based on the full-year 2011 will actually be made in April 2012. And so we will publish this ratio with the Q1 results reporting.

We indicated at the third quarter that we estimated ratio to have remained above 200%, as it was negatively impacted from the half year, primarily by the short falling interest rates, especially in Euro, although the de-risking actions outlined at the half year had gone someway to reducing the impact. In Q4, volatility in the markets remained alleviated. In particular, lower interest rates in the core sovereign bond markets used for discounting the liabilities and increasing interest rates in the European peripheral sovereign markets as well as the increased equity exposure all impacted the SST ratio negatively. In addition to these market driven effects, the SST ratio will also be impacted by the recent acquisitions i.e. Santander and Malaysia. We estimate that after these impacts, the ratio to be in the region of 190% based on second quarter sensitivities.

As mentioned previously, the SST approval process has also not yet finalized. As part of this process, FINMA requires certain adjustments to be made to the full-year 2011 filing, which we expect to reduce the ratio, however to keep it consistent with the AA range. As these adjustments result from the more conservative strains taken that will also likely reduce the approximate ratio of 1.8 that we use to reconcile the internal model to the SST model in the previous quarters.

At Q1, we will provide further insight into the impacts of these model changes along with the reconciliation in our internal model. In the interim and to help provide a further reference point, we estimate our internal economic model to be in the region of a 100% to a 110%, still above our target AA calibration of a 100%. Taking the changes to the SST model as well as the volatile market environment, I’m quite pleased with the continued resilience of our solvency position.

Moving on now to dividends. As Martin already mentioned, we are proposing a dividend of CHF 17 per share, which we expect to maintain Zurich’s position as one of the top dividend payers in the sector. As clearly stated throughout 2011, our dividend policy remains to pay a sustainable and attractive dividend. This means that our decision is not driven by specific payout ratio or yield, while our intention is to pay a dividend which is sustainable and therefore reflects our confidence in the steady cash flows and our expectation for future growth opportunities.

For 2011, the net cash flows from the business amounted to $4.3 billion as forecasted at our Investor Day in December. After taxes and the cost of the debt, the free cash flow on a run rate basis is between $3.3 billion to $3.7 billion available for dividends and redeployment into the business. In addition, we plan to utilize up to approximately $13 billion of additional paid in capital to continue to pay our dividends free of Swiss withholding tax for the coming years. This offers a considerable income tax benefit to our Swiss retail investors as well as other investors depending of course on their local applicable tax situation. The book value per share increased from a CHF198 at the third quarter to CHF203 at year-end, up CHF1 also compared to last year.

In summary, we are very pleased with the results for the year and our ability to withstand the market volatilities. Our cash generation and our solvency position remains strong. We grew selectively in mature markets from General Insurance and Global Life, supported by good progress on our high-growth markets strategy, with Global Life APE organic growth in these regions. The recent acquisitions in Malaysia and Latin America will further reinforce our expansion in 2012. Farmers continued its growth momentum achieving a year-on-year premium increase from almost all business lines and accelerated in the fourth quarter. We continued our underwriting discipline as evidenced by the steady underlying loss ratio improvement of General Insurance of 2 percentage points, as well as our continued strong new business margin in Global Life of 24.5% and our consistent margin above 7% in Farmers. We remain focused on what we can control and we’ll continue to execute on our strategy towards the deliver of our announced targets.

Thank you very much for your attention, and I’ll turn back over to Debra, for the Q&A session.

Question-and-Answer Session

Debra Broek

Okay. So if I could ask Martin and Peter to join me up here on the stage. And it’s time for Q&A now. And we obviously have a lot of people on the line. So again, you know the rules. So if you could try to keep your question to at least two questions per time that you ask, so that we can allow people to have an opportunity to ask their questions. So if we can begin here in the room first. Yes, please.

Unidentified Analyst

Thank you. (Inaudible) Business Daily, Handelsblatt. I have a question regarding Deutsche Bank. Zurich is the leading insurer in the consortium of DD&O, a policy of Deutsche, which has an $800 million claim against the Kirch Group. Could you tell us how much this will cost you or the consortium and could you give us the effect for Zurich? Thank you.

Martin Senn

Yes, thank you very much – yes mic is on. Thank you very much Mr. Alec [ph] for your question. I must tell you that as a matter of principle, we’re not making any comments on customer specific relationships or as well any customer specific claim. So I’m sorry I cannot – and don’t want to go deeper into that.

Debra Broek

Okay. The next question. Yes, René.

René Locher – MainFirst

Yes, thank you, Debra. It’s René Locher with MainFirst. So I have two questions. First, on slide 12, the rate change monitoring, I was looking little bit what your competitors in the US like Hartford, Chubb, and Travelers reported regarding premium rate increases. And there I must say they were much more positive than you are. As far as I can see these 4% you have in Q4, that’s unchanged versus Q3. Perhaps you can just comment a little bit on the US Commercial business.

And then on slide 70 – seven, that’s on the investment, here again, if I’m right the split between government bonds and corporate bonds was something like 50-50 midyear or after nine month. Now I can see that you have increased your stake in government bonds. So here again, what’s the reason for this, because here again some of your peers are investing now much more in term of corporate bonds with strong cash flow like food utilities. Just what is the strategy behind that? Thank you.

Martin Senn

Okay, so Rene, I’ll take your two questions. So two things, one is the US competitors, the investments I will answer. I’m not sure I have fully understood your question. So if I haven’t let me know. You have to look at – first of all the rate increases are really differentiated both by line of business as well as customer segment. So if you look, for example, at workers’ comp, we are increasing our rates by 8%. I think this is pretty much leading.

The numbers that you have seen from Chubb and Travelers I think are in somewhere between the 5% and 7%, but they’re really focused on the commercial market, which is a submarket. If you look at what we’ve done in this particular segment, then our rate increases would be comparable. And, for example, there is a lot of property – our rate increases in property are around 5%. So I think if you look at it then from an apples-to-apples, we’re actually pretty much in line with these competitors. And this is not bad for the market, because we all go in the right direction, we all then benefit from a more appropriate pricing. So that’s the answer to your first question.

The second question, I’d phrase this way. So we haven’t fundamentally changed our strategic asset allocation portfolio other than the equity exposure that I mentioned. We already have exposure to credits in our corporate bond, both banks as well as corporate, and that has not fundamentally changed. We feel that having a strong exposure consistent with our strategy of government bond, especially – and of course focused also lot on high quality bonds is a good way of managing balanced portfolio and keeping the risks under control. Because, yes, you can chase for yield and you can invest more in corporate bonds, but then you clearly increased your risk profile and the capital required and it’s not obviously the risk return is then appropriate.

So does that answer your question? Okay.

Debra Broek

Okay. We’ll take the next question from the line, please.


First question is from Mr. Horgan Spencer at Deutsche Bank. Please go ahead, sir.

Spencer Horgan – Deutsche Bank

Hello, it’s Spencer Horgan at Deutsche Bank. And three questions, please. The first one is, you talked about the potential changes to the facility test model that FINMA are asking you to do, can you just sort of elaborate a bit more on what’s the topic they’re talking about in terms of those changes. And also I think the implication is that you would expect it to cost less than 10 percentage points if I understood correctly, maybe if you can just confirm on that one.

And then secondly talk a bit more about what you were doing on the product side in life insurance. I think Pierre you mentioned Germany in the single premium business. I wonder if you could just also elaborate on that point. Thank you very much.

Pierre Wauthier

Okay. So the changes to the SST model, you have to put the SST model in perspective in how you calculate. It’s a very detailed stochastic model and requires first to have all the results and all the numbers before we can start to run it, because it’s highly complex. And especially as you go into low interest rate environments like us, it’s not easy to predict where it can go. With that comment in mind, that’s one of the reasons why it’s difficult then to predict ahead of time without having run the model what the impact will be.

Now the changes that have been requested by FINMA are around some modifications mostly focused on the ALM side, which because of all the options and guarantees are embedded are hard to predict, but they are not super significant and that’s why we indeed indicated I think – you asked to our colleagues in IR that the impact is probably somewhere in the 5 percentage points to 10 percentage points impact. So it would be a very strong ratio. But the key thing also to remember is that it’s on a more conservative basis and the SST ratio has very conservative assumptions embedded. And for example, all the discount rates are done at government rates and at the lowest risk government rates, so you take basically German bonds for the Euro zone, you don’t go into other countries. So that’s just one item to keep in mind.

We will give you more details in Q1. I think it is more productive when we have the numbers – that they are confirmed that they are filed, then we can go into the detail and explaining all the nooks and crooks and the variances over last year. We just wanted to give you an idea of what was happening and trying to give you comfort around where we’re going, as well as of course, keeping you abreast of changes that we did such as the acquisitions and the equity exposure.

On the product side, what we’ve been doing over the last few years really is we’ve been reshaping the portfolio of Germany. Now, clearly you’ve got an existing book. And like many of the life insurers, there was a lot of traditional products sold, so this remains. But the big focus really on Germany is on more protection as well as more unit-linked product to reduce further the risks. And so we feel comfortable actually with the product mix that we are selling in our new business products, and in particular the new products that we are developing and selling.

Debra Broek

Okay. We’ll take another question from the line.


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

Farooq Hanif – Morgan Stanley

Hi, thanks very much. I have got two questions. On the Swiss solvency tax, I think there is a quite conservative assumption for the discount rate of course spending on which market you’re in, but I was wondering if – do you think FINMA will eventually adopt an approach to that that will start to align this up with Solvency II once we get movement on that. So in your conversations with FINMA, do you see this intention to really move closer to Solvency II and maybe give them uplift. That’s question one.

And question two, looking at the earnings – the statutory earnings of the Santander acquisition, you mentioned that obviously the re-earnings at IFRS would be different because of DAC and related intangible effects. I would have thought actually that impact will be quite small or even positive, given your high growth and the creation of DAC on new business. Could you comment on that? Thank you.

Pierre Wauthier

Yes, happy to do that. On the discount rate, as I already mentioned, it’s governments and low-risk government. There are two things to consider. I cannot speak for FINMA and what their intentions are. What you should however be aware of is that the use of the discount rate is actually in the law. So actually to allow for example the discount using swap rates does require a change in the law. So that is doable. It’s actually not something that from what I understand is completely impossible, but it’s still an enterprise to get that going. So I think in the very near-term the change to swap is probably not going to happen, but over time certainly, and of course FINMA has applied for the equivalence under Solvency II, and I’m sure that this is part of their thought process.

Farooq Hanif – Morgan Stanley

Sorry to interrupt. I mean obviously there is a massive differences in and of itself. But clearly for you I guess you would find a ways of getting around that, anyway you’re very well capitalized, but for local insurers it’s a massive issue, that’s why I asked.

Pierre Wauthier

Yes. But you will understand that I cannot speak for the Solvency position of other insurance companies.

Farooq Hanif – Morgan Stanley

Of course, yes.

Pierre Wauthier

With regard to Santander – so there are more details by the way, note five of our financial statements. I think there are two things happening – and we will provide you more detail really in Q1 – one is the fact that on an IFRS basis you will have this goodwill impairment playing a role, but then of course from that – on an Embedded Value basis in particular you will have then the new business value playing. I think it’s really too early to give you any indications of how this will exactly play out. So if that’s okay with you, I suggest that we park that question and we’ll give you a more detailed answer for – in Q1.

Farooq Hanif – Morgan Stanley

Okay, thank you very much.

Debra Broek

Okay. I’d like to – coming back into the room then, Fabrizio.

Fabrizio Croce – Kepler

Fabrizio Croce, Kepler. I have actually only one question, it’s about the peripheral country exposure. I saw that you shifted some exposure from Italy to Spain, 1.8 billion out of Italy and 1.9 billion additionally in Spain, and I saw that the premium are pretty stable. So is there really a clear view that Spain is better underweight in Italy? This is on your risk report, risk review report.

Pierre Wauthier

This is compared to last year, correct?

Fabrizio Croce – Kepler


Pierre Wauthier

So this I think are indeed actions that we mentioned and have essentially in Q2 where we did – sorry in Q3, we reduced the exposure to Italy, in Q2 we increased our exposure to Spain. So that was disclosed at the time and it was about the risk return in these two countries at the time.

Fabrizio Croce – Kepler

Okay, thank you.

Debra Broek

Okay. Let’s go back to the phone lines again; we have a number of people waiting.


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

Andy Broadfield – Barclays Capital

Good morning, all, and two questions. One, I’m just – been looking with intrigue at the Euro zone haircut slide that you mentioned and you dragged up the same packet Q3 or Q2/Q3 time. I’m just comparing what you indicated there with way you’ve ended up, or you’ve indicated you’ve ended up at the end of the year. And I’m just a little surprised that we’re lower than your scenario of the Euro zone haircut. I was just wondering there is a number of factors, there is acquisitions, et cetera. I was just wondering whether you might be able to give me a little bit more color as to why that gap exist, because for me at the moment I feel like that comfort that we got a little bit from your Euro zone haircuts is a little devalued at the moment. So that’s the first question.

The second question, just on slide – I think it’s slide 31, which shows the BOP ROEs for the different divisions based on the allocated IFRS equity. If I put my eye down those, none of them seems to be getting too close if you did after tax to your targets. I appreciate the Farmers business will skew the whole Group back up and then there will be the sort of non-core and other operating businesses as well. But I was just wondering how should I think about those different divisions or should I think the GLA BOP ROE should look like and like et cetera within your sort of Group targets?

Pierre Wauthier

Okay. So I will take the last question first and I will I think probably ask you to ask again the question on the Euro zone haircuts, because I’m not sure I understood. On the BOPAT ROE, what you have to keep in mind is if you go back to the concept of the 16% BOPAT ROE and we’ve indicated that in this challenging market 2 points lower is a more realistic, so I guess that would translate to 14%.

Now what you have to take into account is that if you actually achieve around 12% on Global Life and Life and then the fact that the BOPAT ROE on Farmers is achieving somewhere between 45% and a 50%, then lifts you up to the 16%. So that’s being – so therefore you don’t necessarily need on the pre-tax basis even a 40% to be at 18, you can really afford to be lower. And that’s part of the Zurich model. So with that being said, I think the return that we’re achieving on GI we’re not happy with this.

As we’ve explained, there has been a huge impact of losses and CATs which is 3 points, 4 points above the average over the last five year. And to be fairly true, we are not planning the same year in the future. So – but that’s why you have if you want the improvements actions first on the underwriting, so we’re continuing on improving the loss ratio as well as in on a normalized basis if you look at the normalized cap, then you get much closer on the GI side to our target levels.

And then on the Global Life side, the move towards more capital light product will also further improve the ROE. So it’s really all these elements, when you take them into account, go back to normalizing, take the Farmers into account, improving returns on Life that get us back to our target ROE.

Andy Broadfield – Barclays Capital

So the BOP ROE and pre-tax of 18% you think is the GI for North America Commercial for example are pretty good result if you were to achieve that across the board, given the other things you’ve mentioned.

Pierre Wauthier

If we can achieve 8%, that would get us to something that would be – we’re always aiming for more, but it’s already get us into quite solid results.

Andy Broadfield – Barclays Capital

Okay. I’m sorry, to the solvency question, so I can make it clear. You went from 225% I think to 198% under your scenario to Euro zone haircut. Your Q4 movement would take you down 190%, and Q4 was not particularly pleasant but it was significantly less than the Euro zone haircut scenario, so I was just trying to reconcile those two numbers and to get myself comfortable Euro zone haircut is – the modeling you did was still valid.

Pierre Wauthier

Okay. This actually has a limited – not too much to deal with the Euro zone haircut, I think it’s better to work from the 225 down to the 190. We said – so Q2 was 225%, that’s what we’ve reported. We indicated at Q3 that given the market turmoils we estimated the ratio to be above 200%, right? So let’s take 200%. So really then what you’re trying to reconcile – and this is due to the increased volatility, the Euro market and markets down, I think this recovered back in December. So now what you need to reconcile back to is the 200% to the 190%.

There is two impacts that are pretty clear. One is the impact of the acquisitions. We’ve already taken that into our account, because acquisitions have been completed, so they have an impact both on the available financial resource as well as capital requirement. That’s – and I won’t give you an exact number, but that’s only a few points from both of these. In addition to that we have increased the equity exposure, that also further has a downward impact on the SST ratio. And then in the region of a 190% is because there is indeed uncertainty.

And in particular, it’s really very difficult to estimate what is the impact going to be of the lower interest rates in the core Euro zone country, because that has a negative impact on the RBC. So that will also be an impact. That perhaps you haven’t fully taken into account and then the future credit spreads on the peripheral. Just to be – that’s why we mentioned – where I mentioned in my opening speech the lower discount rates that we use for the SST, which is based on German bonds, then has a lowering impact on the DIFR [ph] and also has an impact on the RBC. So it’s without methodology change, something that is difficult to fully understand and quantify at this stage, that’s where it’s getting to the complex calculations.

Debra Broek

Okay. We’ll take another question then from the room, please. Thomas [ph], here in the front.

Unidentified Analyst

(Inaudible). First question goes to the investment side. Seen from the figures, you invested about $25 billion into bank debt. I would wonder how do you assume your risk on that financial sector investment and how much is your interest in investing into new forms of bank debt like the CoCos and the sort of bank CAT bonds that the UBS chose – has placed in the market.

And another question maybe to Martin Senn is regarding expansion into new and expanding markets. How much is your – has your appetite been stilled now with your expansion there in Latin America and Malaysia or do you plan other rounds of expansionary moves?

Martin Senn

Thank you very much, Mr. Henga [ph]. Now, let me actually try to answer both questions or do answer both questions. On the first, I should stress that our portfolio in bank related fixed income paper is very well diversified as you can see as well geographically bodes us well with maximum exposure to seeing all issuer, so we feel really comfortable in the way the portfolio has shaped, also in terms of how the portfolio has been developing and performing altogether.

With regards to the second question, would we invest in the CoCos, I would say this somewhat for a liability driven investor, us, as we are in an environment with the solvency regime which is economic and risk-based challenging to invest into say an asset which has very specific characteristics as a CoCo has. Because what you really – in the case of a CoCo what you really buy is kind of a bumped with equity kicker which in a certain situation should the issuer have a capital sort of constraint converts from a bond into equity and the challenge I was referring to how do you model that then into a – in a regime where you potentially exactly – at those moments when markets are potentially stressed and you might be stressed because of having this exposure that would make it very, very challenging.

So with that, we are not investing into any asset and I’m not only referring now to CoCos where you cannot really ideally model that in any given situation until you make it dependent on market development. And this discipline has been one of the reasons why we have managed so well through the crisis. Now we also have avoided for example in the past to invest – at least heavily invest that would not excludes at this position, but we have not really matched the things in CDOs, because in CDOs for example it was obvious to us that in a stress situation how do you absorb additional the credit requirement you have, because of the huge level in such products which you cannot really model in a balance sheet such as a liability-driven investment company. I hope that gives you the answer that these are in our environment investment opportunities which are very difficult to model and therefore we are shying rather away from it.

Unidentified Analyst

And the expansion?

Debra Broek

And the expansion.

Martin Senn

And the expansion, of course, into Latin America and Malaysia, I would in those specific markets – your expansion was as well is your appetite satisfied? I mean we always look to continue to grow both organically and inorganically if it meets our hurdle line and if it meets our strategy, our business plans, et cetera, et cetera.

With regards to Latin America, we feel that we have now an excellent platform to capture future growths. Keep in mind, we have been in Latin America for over 40 years already before this alliance and with Santander, but now the combination with this multichannel distribution opportunity with Banco Santander our own platform I think gives us enough to work with, and there is no immediate plan to look for further inorganic expansion opportunities in that part of the world. We are very, very solidly positioned and have a good platform. I think the same is about it for Malaysia, with Malaysia Assurance Alliance Berhad. It’s a wonderful asset to have, it’s a very good cultural fit, we are very pleased to adopt.

Overall, I think there will be new opportunities and more opportunities for Zurich to grow into high growth markets. And if there is any such opportunity, naturally with the discipline I have referred to, we will have to look at it. And if there is a good fit, we would execute on it. But let me as well stress that we are – feeling that we are in a very strong position the way we are organized in terms of our geographical spread but as well in terms of the reach we have with our products go this moment, and from that point of view we are rather patient, patient I should say market participants and don’t feel rushed in anyway. Our priority is to do it “The Zurich Way” with focus and with discipline, and generate value for all stakeholders.

Debra Broek

Okay. Then we’re going to go back to the phone lines again, because we have a few people waiting there, so if could take a question from the phone.


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

Brian Shea – Bank of America Merrill Lynch

Good morning. I just have two basic numbers questions, please. First of all, your Life BOP was very strong in the fourth quarter. In the past, you guys have been very good about pointing at one-off effects that influence that number. Pierre, is there anything that you need to point out, any kind of one-off influences on that fourth quarter number?

And then, secondly – thank you very much for the update on Santander and the Latin American operations. When I model this probably quite similar to how everyone does it, I’ll need to model Life and non-Life separately. Can you give me an indication of how that earning – the earnings in 2011, even a rough indication of they’ve split between Life and non-Life? Thank you.

Pierre Wauthier

So Brian, thank you very much for these questions. With regards to the Life BOP, I don’t have a specific number in mind, but I do remember however is that that was not very significant and this was definitely not higher than the – we always have some, but it was not a big number. And if you’d like to have specifically the number, then I would advise you to go back to IR.

The – sorry the other question was on –

Debra Broek

Santander’s for GI.

Pierre Wauthier

Sorry, Santander’s for GI. I’m sorry we do not have that and I can only refer to the – this is primarily Life so it’s a big portion of the earnings in the Life segment.

Debra Broek

I think what you could possibly use Brian – this is Debra – it’s around 70-30, that’s probably a pretty decent proxy.

Brian Shea – Bank of America Merrill Lynch

Okay, that’s good. Thank you.


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

Andrew Ritchie – Autonomous

Hi. Just the first question is more sort of a clarification. When you talk about – I think you’ve told us this in the past. When you talk about rate change, I just want to understand the pace of earned rate change across your portfolio. It looks like the earned rate changes is around 3%, 3.5%, or is that not actually earned (inaudible) written, so maybe just talk about written versus earned rate change. And within that context, how would you characterize the likely pace of earned rate change versus loss cost inflation – underlying loss cost inflation.

And the second question, just a quick one. Workers’ compensation in the US, which you’ve been adding to since I think it was 3Q 2010 you made the mention of it, this time you no longer see any lead time to reserves there or is that still – is it still an ongoing driver? Thanks.

Pierre Wauthier

Okay. So the pace of the earned rates, the rate increases that we indicate are on the written basis. So it’s the rate action we take, which then influences the written premiums, and then the written go into the earned. So you’re right in that. There is a lag in that, the rates needs to first go through the written, and then from the written to the earned. So it’s actually – as to take into account the complete fully effect is more than a year. But that’s also why – since these rate increases have been going on for quite a while you were seeing that earning into.

Andrew Ritchie – Autonomous

Roughly the earned would now be only something like 2% year-on-year then or thereabouts.

Pierre Wauthier

Well, yes it really depends on line of business – the line of business. They’ve been relatively stable over the last three years with some increase. So I would go perhaps more towards 3%, but it’s probably somewhere 2% and 3%.

The loss cost inflation was the second question. Of course, this is something that we carefully monitor. That is one of the reasons why we substantially increased our reserves in the workers’ comp business. We feel that the rate increases are in pace or exceeding claims inflation, that’s part of the underwriting actions. It obviously varies business-by-business, country-by-country. For example, we had some reserve releases in Switzerland, this is due to a change in legislation on the so-called whiplash claims, so that’s completely done (ph) changes last quarter. But broadly speaking, we feel comfortable with the rate increases versus the loss cost inflation.

With regards now to workers’ comp, you’re right, didn’t mention anything, and this is due to the fact that we haven’t seen any adverse development in this quarter which is very encouraging. I would put a big caveat is that it’s very encouraging to see that. It’s still a very long line of business that is subject to different approaches by judges and interpretation of law. And therefore while it’s a good quarter, as the French say, [Foreign Language – French], which means that we will continue to monitor that very closely.

Debra Broek

Okay. I’ll take one more from the phone and then one more in the room here. So if we could have the phone line, please.


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

Michael Huttner – JPMorgan

Excellent. And two questions. On the slide – I think slide 46 in the Life, I love these segmental presentation. You serve other in Europe if you go minus 63 million, just wondered what that was. And then the other question is, I really welcome all the detail on Santander, I think – but given you’ve actually – completed the deals in October/November, I don’t quite understand why there is a kind of delay. I’m sure there is a good explanation as to (inaudible) seems weird such an efficient company as Zurich would say “No, we haven’t done it, we will do it next quarter.” Thank you.

Pierre Wauthier

So Michael, thank you for your question. On the first question, that specifically I don’t remember right now. It’s something that I would refer you back to IR with regard to the specific negative item. Maybe we will come back.

On the Santander, you have to look why we try to be and continue to be as efficient as possible. You have to keep in mind that this is something that we completed – just completed in November for the biggest part which is Brazil and Mexico. And the accounts that are prepared are not the same as we will prepare it on the IFRS. What overall Santander prepares on an IFRS, the rules are different, they’re less detail, much less detail, they are not an insurance business, I mean they are a banking group with insurance operations.

So in order to get to the level of disclosures that we feel comfortable there is really a lot of work that we need to do, data that we need to get, because it’s not cut the same way as we needed to be, and that just takes time. Now – and I think it’s also very dangerous to give you a high-level estimates, because, yes, we’ve been doing that, but frankly it’s not where the robustness that it should have, so that it’s prepared for disclosure.

Debra Broek

Okay. So then let’s take one last question from here in the room. Yes.

Unidentified Analyst

(Inaudible) Mr. Senn you mentioned when you took over your job, one of your long-term goal is to make Zurich the best world insurance company. How far have you come so far and how do you measure such a goal?

Martin Senn

Thank you very much, Mr. (inaudible), this is indeed our ambition I should say, this is not the long-term ambition, this is the ambition. And, clearly, you cannot as an organization like Zurich which has this global reach, which has this success, you cannot be sure than anything else than having the ambition, not only to play in the champions league but also to win it. And when I say that, the way we measure it, this is in terms of what is the satisfaction of our stakeholders i.e. our shareholders, our customers and our employees.

This is to measure and we do that in principle with the shareholder, because we see everyday how is our share price changing relative to the other competitors, global competitors, how are they paying dividends and so on and so forth, what is their reputation. I think we do very well there and we’re probably one of the best. And when I say to be the best does not mean number one always all the time, but be – really being the top in the first quartile of league table. So there we are probably have done a very good job in the last years and we want to continue doing a good job.

With regards to our employees, we do – every year we do engagement service, where we get results in terms of how they feel, how they don’t feel, and we take it very serious, and we’d encourage them to be open and honest in the feedback and to tell us the truth. And we want to hear the truth and the truth is, tell us where it does not work in terms of how we are engaging together as colleagues, and we’re making good progress.

Last thing, for example, we have moved up in the engagement of our colleagues around the world in an environment where the insurance sector and the engagements that we have dropped. So we are positive within Zurich, negative in the market, we want to keep that trend going. Are we already there to be considered the employer of choice? No, there is much needed, much more work needed, and we work very hard on that day by day.

With regards to the customer is the say, we measure that, we have trim scores where we measure per market, per product, where are we, how do we compare relative to our competitors and the same there, wherever we can take action we take this action. This is a process, it will never stop, because the moment we stop resting that’s when we’re going to fall back.

Unidentified Analyst

One more thing with the integration of old – the acquisitions you made, does this absorbs resources to, does this hindering your daily business?

Martin Senn

No, it does – naturally it takes resources, but it’s not hindering our daily business. This is part of our daily business. And I think the art is obviously to find the right balance in terms of how do you run the existing platform versus being able to integrate new platforms and we have to consider that, and we do that, and we prioritize that in terms of we’ll have a resource capacity versus the post merger integration opportunity and so on and so forth.

Debra Broek

Okay, very good. Well, then, I think Martin I’ll turn it over to you for closing remarks. Although, I think those were some of your closing remarks.

Martin Senn

Thank you very much, Debra, and thank you very much ladies and gentlemen for joining us today here in Zurich and on the telephone, thank you very much for your questions and as well thank you for the good dialog we could have together.

I do hope that today’s announcement has reminded you that we remain a very robust business. A business that through a combination of financial and underwriting discipline and the effective execution of our strategy continues to weather the very challenging economic times in which we live, generating sustainable profitability, paying attractive dividends and enhancing our platform for future growth.

We continue to generate strong cash flows. We have a strong capital base and solvency position. We are growing where we want to grow. And thanks to our resilient performance in 2011 and the continuing execution of our strategy, we are well positioned to outperform in a challenging market.

Now, these results would not have been possible without the support of our customers, our business partners and of course the very hard work of all our employees and colleagues around the world. And so I want to thank all of them for everything they do and you do to make us a better, stronger company, everyday. And I thank you as well for joining us here today. And as usual I wish you a good rest of today, as usual I wish you as well good luck in the markets. Thank you very much.

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