Swiss Re's (SSREF) CEO Christian Mumenthaler on Q2 2016 Results - Earnings Call Transcript

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Swiss Re Ltd (OTCPK:SSREF) Q2 2016 Earnings Conference Call July 29, 2016 8:00 AM ET

Executives

Christian Mumenthaler - Group Chief Executive Officer

Philippe Brahin - Head of Investor Relations

David Cole - Group Chief Financial Officer

Analysts

Xinmei Wang - Morgan Stanley

Olivia Brindle - Bank of America Merrill Lynch

Kamran Hossain - RBC Capital Markets

William Hawkins - KBW

Andrew Ritchie - Autonomous Research

In-Yong Hwang - Goldman Sachs

Vinit Malhotra - Mediobanca

Sami Taipalus - Berenberg

Thomas Fossard - HSBC

Philip Kett - Macquarie

Frank Kopfinger - Deutsche Bank

Vikram Gandhi - Société Générale

Christian Mumenthaler

Thank you for watching this presentation on Swiss Re's second quarter and first half year results. I am Christian Mumenthaler, Swiss Re's Group CEO, and I am here today with our Group CFO, David Cole. Together, we will be presenting our Group's achievements in the first half of the year, our financial performance for the quarter and our business outlook for the rest of 2016.

Let me start with our achievements in the first half of the year. As you know, the market environment remains challenging, impacting all insurance players in multiple ways. First, global economic growth remains low and political uncertainties continue to prolong the low interest rate environments. Global financial markets are experiencing significant volatility and European markets have entered a period of uncertainty following the UK vote to leave the EU. The political and regulatory environment is also challenging, with political instability, particularly in Europe, and growing skepticism towards globalization.

Swiss Re's diversified business model and operating structure are key strengths in this current turbulent macro environment. Specifically, within our industry, P&C prices are at very low levels; however, we see signs of stabilization in rate developments. This environment can only be managed by maintaining strong underwriting discipline. As a consequence, we have been reducing capacity in flow business and growing our portfolio of large and tailored transactions, in which we achieve differentiated terms and conditions.

Finally, technological innovation is expected to significantly affect the insurance industry and the risk landscape. While this development brings challenges, it also creates multiple opportunities for us as a risk knowledge company. Swiss Re is well-positioned to withstand this challenging environment. Our results for the first half of the year demonstrate our resilience and strong market position. Allow me to mention a few achievements.

First, our Group ROE for the first half year of the year remains solid despite the high level of large losses experienced in the second quarter. We demonstrated underwriting discipline in the renewals and systematically deployed capacity to business that meets our profitability hurdles. Our asset management team delivered a strong return on investments, despite volatile markets and the prolonged low yield environment. We successfully executed our 2016 funding ambitions ahead of the recent market volatility and remain comfortably within Group leverage targets. Our capitalization remains very strong and resilient to financial shocks and insurance events.

Moving on to our business units, I would like to highlight other achievements during the first half of the year. In Reinsurance, we have maintained underwriting discipline and closed large and tailored transactions at attractive conditions. Life & Health Reinsurance saw another solid first half of the year and remains an important contributor to our overall results. Together, both reinsurance segments have paid a strong dividend of $2.9 billion to the Group in the first half of the year.

In Corporate Solutions, we continued to expand our product capabilities with the acquisition of IHC Risk Solutions. Corporate solutions paid a dividend of $250 million dollars to the Group in Q2.

The rollout of Life Capital's strategy and the integration of Guardian are well on track. We continued on our path to establish flexible funding platforms with the successful execution of an inaugural public debt issuance of Swiss Re Admin Re Limited. Life Capital paid a dividend of $350 million to the Group in Q2.

I'll now hand over to David for the financial highlights in the second quarter and will return later to update you on our business outlook and priorities.

David Cole

Thank you, Christian, and good day to all of you also from my side. I will begin my presentation with the key financial highlights for the second quarter. Today, we report solid Q2 results, even though the quarter was impacted by several large losses and persistently challenging market conditions. Q2 Group income was $637 million, bringing us to a total net income of $1.9 billion for the first half of the year.

The Group ROE for the first half demonstrates financial resilience as well as the benefits of our global and diversified business model. P&C Reinsurance reports an ROE of 9.4% for the quarter, impacted by a number of nat cat losses. Life & Health Reinsurance maintains its solid performance with an ROE of 10.1% for the quarter.

Corporate Solutions was impacted by two large, 2015-related man-made losses and reports a negative ROE of 4.2% for the quarter. Life Capital delivers another quarter of strong performance with an ROE of 13.4%, reflecting the contribution of the Guardian acquisition.

Our Asset Management team produced a strong ROI of 3.7% despite the continuing low interest rate environment. As Christian mentioned, all three business units have meanwhile paid dividends to the Group with respect to 2015 and the capital position of the Group remains very strong.

As usual, I will not take you through this slide, which offers an overview of the key figures reported. I will just point out that unrealized gains significantly increased shareholders' equity during the quarter, mainly as a result of lower interest rates.

P&C Reinsurance was impacted by a number of large losses in Q2, but benefited from a positive prior-year development. Our net pre-tax loss estimate for the Canadian wildfires is $220 million. Together with the losses from the earthquakes in Japan and the floods in Europe, overall large natural catastrophe losses added up to approximately $350 million. While this is above our expectations for the quarter, it is within our nat cat budget for the first half of the year.

These events remind all of us that while the time, frequency and severity of natural catastrophe losses are difficult to predict, we do expect them to revert to the mean over time. The combined ratio for Q2 reflects the adverse natural catastrophe experience as well as several large man-made losses. We continue to profitably grow our business through large and tailored transactions at attractive rates.

Life & Health Reinsurance reported another quarter of solid performance. In Q2 we saw growth in all regions coming from large and tailored transactions but also from successful renewals in China and Australia. In terms of operating performance, Q2 benefited from the strong contribution from Asset Management, but was negatively impacted by valuation updates and by adverse experience in the Americas.

The net income for the quarter translates into an annualized ROE within our target range, while the ROE for the first six months remains strong at 12.6%. Corporate Solutions' results were impacted by two large man-made casualty losses in North America, which occurred in the third and fourth quarter of 2015. The magnitude and responsibility for these losses were only established in the second quarter of 2016. The business unit reported a net loss of $25 million for the quarter with a combined ratio of 112.7%.

As Corporate Solutions currently mainly underwrites excess layer business, its results are exposed to a relatively higher degree of volatility. Corporate Solutions remains focused on the quality of its portfolio, while the current pricing environment remains challenging. The gradual expansion into primary lead business represents an important investment area for the business unit and the Group remains committed to supporting Corporate Solutions' growth ambitions.

Life Capital delivered a strong performance across all metrics. With the move to Solvency II, the calculation for gross cash generation became more sensitive to market developments as we have already seen in Q1. In spite of the UK interest rate and credit spread movements toward the end of the quarter, Life Capital generated $141 million in gross cash in Q2. We reiterate the business unit's three-year gross cash generation target of $1.4 billion to $1.7 billion.

Life Capital's net income was strong for the quarter, supported by underlying performance in line with our expectations and net realized gains in the Guardian derivative portfolio. In line with our previous communication, we continued to manage down the exposure of the portfolio to interest rate moves during the quarter.

The return on equity for the second quarter was 13.4%, despite a significant increase in unrealized gains, which elevated the equity base. Our Asset Management team contributed to the Group's overall performance through a strong return on investments of 3.7% in Q2. Our overall invested asset base increased from the prior year, driven primarily by the Guardian acquisition.

Our asset allocation in the second quarter remained relatively stable, with a moderate increase in government bonds as we reduced our exposure to interest rate derivatives and we modestly reduced our holdings of equity securities. The running yield was stable compared with last year's level as the impact of continued low reinvestment yields was offset by the positive impact of Guardian.

Net realized gains were generally in line with the prior year's amount and were driven by sales of fixed income, equities and alternative investments as well as gains within the Guardian portfolio, including derivatives. Impairments, albeit higher than last year, remained low relative to the overall portfolio, reflecting its high quality.

Details on our U.S. GAAP common shareholder equity are on slide 15. Net income and unrealized gains were the main drivers for the rise over the previous quarter, offset by dividends paid and by foreign exchange movements.

I will now hand back to Christian for the business and strategy outlook.

Christian Mumenthaler

Thank you, David. I will provide you with the business outlook for 2016, together with our priorities. July renewals are important for P&C Reinsurance as they represent approximately 20% of our treaty portfolio. As I said, the market conditions continue to be challenging and as a consequence, we have reduced our normal flow business by 7% year to date. Overall, however, we were able to grow our business by closing large and tailored transactions that were placed with Swiss Re on a private basis and which had better economics.

In the July renewals, price levels continued to erode in property, although to a lesser extent than previously. We continued to actively steer our portfolio by reducing natural catastrophe capacity in specific segments, including U.S. hurricane.

On average, our casualty rates remained stable. Overall, we deployed our economic capital at attractive returns and our risk-adjusted price quality year-to-date remains at 102%, the same as at January and April this year.

The strategic framework we introduced last year will continue to drive the priorities of the Group, as well as those of our business units. Reinsurance will maintain underwriting discipline and actively manage our in-force book. The team will continue to focus on achieving differentiated economics. We will do this by supporting clients with large and tailored solutions and by deploying our risk knowledge on the basis of our very strong balance sheet.

Corporate Solutions will also remain focused on underwriting discipline and pursue its expansion into the primary lead segments. Life Capital will continue to seek attractive opportunities in closed books, while accelerating its growth strategy in open books. These priorities are central to achieving our financial targets and I can assure you that delivering on these targets remains our top priority.

Thank you very much for watching this video on Swiss Re's second quarter and first half 2016 results.

Good morning or good afternoon, everybody and welcome to our Q2 results conference call. I'm here with David Cole, our Group CFO, as well as Philippe Brahin, our Head of Investor Relations. Maybe start with a brief overview of the results we published this morning.

As we have seen, reported solid results even though the quarter was impacted by large losses and persisting challenging market conditions. Q2 2016 Group net income was $637 million, bringing us to a total net income of $1.9 billion and an ROE of 10.9% for the first half.

P&C Reinsurance reports an ROE of 9.4% this quarter, impacted by a series of large losses such as wildfires in Canada, earthquakes in Japan, and floods in Europe. In the July renewals, we continued reducing capacity to our flow business and growing our portfolio of large and tailored transactions. These transactions are placed with us on a private basis and offer differentiated economics. In this context, we managed to maintain our risk-adjusted price quality at 102% year-to-date.

Life & Health Reinsurance maintains its solid performance with an ROE of 10.1%. Corporate Solutions results are impacted by two large 2015-related cat losses and the business unit reports a negative ROE of 4.2%. Because Corporate Solutions currently mainly operates in the excess layer business, it is exposed to a relatively high degree of volatility.

Life Capital delivers another quarter of strong performance with an ROE of 13.4%, once again benefiting from net realized gains from the derivative portfolio of Guardian. We continued to reduce the exposure of this portfolio to this volatility during the quarter.

Finally, our Asset Management team produced a strong ROI of 3.7%, despite a low interest rate environment. Overall, our invested asset base increased driven by the Guardian acquisition. All business units have now paid dividends to the Group and the capital position of the Group remains very strong.

With that, I hand over to our Head of Investor Relations, Philippe Brahin, who will introduce the Q&A session.

Philippe Brahin

Many thanks, Christian, and good day also to all of you from my side. Just before we turn to the Q&A, I would like to remind you to please restrict yourself to two questions each and re-register for follow-up questions. So with that, operator, could we please take the first question?

Question-and-Answer Session

Operator

Sure. The first question is from Xinmei Wang, Morgan Stanley. Please go ahead.

Xinmei Wang

Hi, two questions, please. My first question is on the losses in the pricing environment. Given that we've seen quite unusual large losses in this quarter, I was wondering how unusual do you think the losses are and would you say that given these there's an opportunity now to deploy capital in this market from that? And then my second question is on the combined ratio guidance for 2016 in P&C Re. Do you think the 99% underlying guidance is still achievable given the results? And I think Matt also mentioned on the 1Q conference call that we should be expecting more growth in casualty and maybe some more pricing impacts to come through. Thank you.

Christian Mumenthaler

I'll take the first one. So in terms of the nat cat losses Q2 I think overall the sum was $351 million, the biggest chunk of it comes from Canada. That is higher than expected for Q2. But I have to put it in context, in Q1, we had no nat cat losses and so together actually Q1 plus Q2, the overall cat losses are slightly below our expected. So taking that into account, I doubt that this in itself will lead to higher prices in the next renewal rounds.

I think what will eventually move prices apart from the potential large loss is a whole series of other factors, pressures coming from all different angles, one of which being already the low interest rate environment, which hurts people; one could be on the reserving side, if reserve releases start to be less abundant. And then, yes, if loss ratios overall just approached the average expected loss, and if you take some of the other factors, it could get into a situation that even in the absence of a very large loss, prices start to stabilize again and maybe go slightly up. But it would take Q2 in itself, it's really nothing particular in terms of the cat loss.

David Cole

Let me then come back to the second question, thanks for that. Indeed I recall the discussion with Matt at the time of our Q1 results. If you recall, in Q1 we had adjusted combined ratio for P&C Re of a little bit below 96% at 95.7%. Now with Q2 reporting 101.9%, so for the first half, 98.8% which is just slightly underneath the guidance that we've given for the entire year of 99%. There's nothing at this point that would lead us to conclude that we should adjust that. I think Matt was talking about is just the inherent uncertainty of these estimates, if you will, given the uncertain Jack mix of our business, what happens with pricing over the various subsequent periods. So there is nothing now in our Q2 results or developments off the back of the July renewals that would suggest to us that the 99% guidance is still not the appropriate to give.

Operator

Our next question is from Olivia Brindle, Bank of America Merrill Lynch. Please go ahead.

Olivia Brindle

Hello. I had -- my first two questions. The first one just thinking about your updated combined ratio methodology, when you talked about that at 1Q you mentioned this $300 million of cat loses, which effectively comes through is prior-year development, the following year. So I was wondering if you could update us on how much of this is in the year-to-date numbers, effectively relating to 2015, how do we think about that $300 million?

And then secondly, on the reserving position and thinking about your buffers, the longer tail lines of business. I am just trying to quickly look through the triangles that you published and compare them to where we were previously. And it looks like on your general liability lines you are slightly healthier, but the motor is maybe slightly weaker. I was just wondering if that seems like a fair assessment and in particular in light of some of the reserve additions you've made on the motor side year-to-date, how has that sort of restored your buffers to previous levels? Thank you.

David Cole

Thank you. I actually start with the second, and come back to the first. So thanks for mentioning the reserve, but we also publish, as you know, every year at this time. A couple of general comments, we haven't changed our reserving philosophy. We continue to be prudently reserved, best estimates across the entire book, which we go through the process four times a year. Always, individual adjustments on various lines across the different geographies, but overall, I would say, we've maintained our comfort in terms of where we are within the best estimate range, and we tend to be north of 50, actually generally positioned somewhere between 60 and 80, and that continues to be the case. Always individual lines, a little bit above that, and lies a little bit below that, but overall I think we continue to feel that we have a very appropriate prudent level of reserves and nothing has changed now related to developments in Q2 that alters that position.

As to the adjusted combined ratio, actually I am going to say, Olivia, now not a whole lot I'm going to give you on that, we published our numbers for Q1 and for Q2, we are going to come back of course, at least on an annual basis and give you folks an update on that. But I think sometimes there is a little bit of a move toward an almost overly defined, overly experienced type of granularity and accuracy in some of these things. So we're going to keep with the numbers that we've produced. There is nothing has changed. We still have the overall expected loss budget of $1.5 billion, recognition of that all will come through in the form of actual claims during the course the year and some part of it will holdover from previous year. So, no update there.

Olivia Brindle

If I could just follow-up on the reserving side and motor quickly, are you comfortable now having made, I guess, three quarters of additions on the U.S. side and that's reflective of the market conditions, or should we expect anything further there?

David Cole

Absolutely, I mean, of course, I don't what will happen going forward. But based on all the information that we know, the information we receive from our cedents, we've gone through our portfolios, we've topped them up as you mentioned earlier this year second time now in Q2. We believe that the level of reserving that we have for that business is also very prudent.

Olivia Brindle

Okay, thank you.

Operator

Our next question is from Kamran Hossain, RBC Capital Markets. Please go ahead.

Kamran Hossain

Hi. I have two questions, one for Christine. I guess, four weeks into the job of CEO, can you just maybe run through what the biggest concerns I guess are you looking to address at Swiss Re in the coming years, kind of what are the things that are on your desk, top priority? And the second question, I guess, one for David, in terms of the realization of gains of the second quarter, so quite a bit of that, again, in Life Capital specifically, will these continue throughout the year or you are pretty much done now? Thanks very much.

Christian Mumenthaler

Thanks, Kamran, for a tricky question, very smart way to asking. So anyway, to me, there is obviously no big surprises, because I've been part of the Executive Committee for 10 years now. So my life hasn't completely changed in these last four weeks, I haven't discovered anything I didn't know before. So it's very much everything in a continuous mode. What is very clear and obvious is that we're in a cycle, we enter a period that is more difficult, the whole industry enters that, and it has started a while ago and I think all the new CEOs in Europe in particular in the insurance industry will face some of that.

One obvious one is the low interest rate environment, which now off this quarter is probably going to stay even longer low, which particularly impacts Life & Health, primary Life & Health for some of our clients, but also some of us, right, because the investment that is really important, so that must be a concern of every CEO in the insurance industry.

And the other one is the obvious pricing cycle in P&C, which is nothing new as always happened and we certainly keep very calm, but we know it's concerning and it's not pleasant when you're on the way down. So we see some slowing down of that, but it's not yet the bottom, it seems, and so I'm mentally prepared for one or two difficult years before the cycle inevitably turns because I still believe in cycles. Obviously I see nothing that would prevent cycles to continue in the future.

So I have no big news for you. I think it's pretty simple. We have the assets side and the liability side, liability side is the P&C core area, which is a high concern, other than that, I have nothing particular in my mind.

Christian Mumenthaler

I'm sure, way more in December.

David Cole

Thanks. Let me pick up the second question. Thanks for that. Let me be very short, there is no way that we would expect the level of profits at Life Capital has delivered in the first half would be repeated in the second half. As you know, we acquired Guardian, we're in the process of – by and large than what we wanted to do, to bring that portfolio under our governance, positioning it also for Solvency II, moving a little bit out of the derivatives market more into the cash market, also looking at the underlying investments and determine either they meet our quality expectations as well.

So we've been transitioning that investment portfolio over the course of the last six months and we've frankly benefitted, sometimes it's good to be lucky, so we frankly benefited from during that period of time interest rates have been reducing, while we were still sitting on that derivatives portfolio. But that is now, as I mentioned, by and large down, there still maybe a little bit of trimming and managing the portfolio that we would expect to do, subsequent to the Part 7 transfer, which as you know we anticipate during the course of 2017.

Offsetting the P&L benefit that we've seen it has had a little bit of a drag on the level of cash generation that we report. As a result of the same lower interest rates driving a higher solvency requirement, under Solvency II, we experienced – impacted that a little bit more significantly in Q1 and in Q2. Actually very happy to see that the underlying business is very much performing in line with our expectations, the integration of Guardian, very much going in line with our expectation. And also on that basis, we've reconfirmed our target of $1.4 billion to $1.7 billion of cash coming off of that business during the period 2016-2018.

Kamran Hossain

Fantastic. Thanks very much.

David Cole

Yeah, sure.

Operator

The next question is from William Hawkins, KBW. Please go ahead.

William Hawkins

Hello. Thank you very much. Can you tell us what lessons you're learning from these two losses you've taken in the Corporate Solutions division? I'm also trying to understand the facts completely, but on the one hand they seem to be too complete discrete loss events. But there seems to be a great coincidence in location, size, timing and nature of loss. So, is there something on the underwriting side that you need to learn from that or what's going on with those losses? And then very brief on a point of detail, did you get your exposure there as a follow up, in a syndicate or were you the leaders of that exposure?

And then secondly, a capital management question. This looks like we're heading towards the first year – four years, when you can have a normal P&C results. If that happens, it looks like your P&C Re earnings is going to be at least $1 billion lower than they've been for the past few years which may imply that the dividend from P&C to the center could be lower than for the past few years, which then makes it look like the buyback coverage into the future carry significantly greater risk. You've never kind of committed medium-term on that points, but how concerned should we be about the sustainability of the buyback, if you do end up getting a few more normal years of P&C results? Thank you.

Christian Mumenthaler

So, I can take the first one even though of course this is obviously not yet my specialty, but I'm working a lot to get into it. So as you can imagine we studied that in quite some detail these two losses. And I think there's really I can't see any commonality between the two except that maybe they are in California and they have a torrid system there that gives very generous rewards to claimants. But I would say taking a step back, right, if you think about the whole strategy of Corporate Solutions to me, it still makes complete sense to have that strategy as we're a risk knowledge company and gives us access to risk wouldn't have otherwise.

I think the philosophy of it is also quite clear that is we write risks to the balance sheet, the full balance sheet of Swiss Re, so we don't try to optimize this a little sub part of the business, which means they don't buy tons of reinsurance to isolate themselves from returns. As a result of that I would expect a higher overall return on average from Corporate Solutions compared to some peers, but also some higher volatility where sometimes they have larger losses.

And the team hasn't changed over the years, and if I look at their track record, I think they definitely, completely fulfilled that expectation. So the general performance has been higher than average in the industry, but this quarter, we don't see our compares yet, but this quarter has been hit by two loses, which is disappointing, but had to be expected.

I think another factor is a rule which is that the book isn't that large yet, so that adds I guess to the volatility we have to expect from that book of business and that's something that should take care of itself over time. I mean this said, it's clear that in this part of the business, everywhere the margins are going down as to do in P&C Re, and the only right thing to do for the team is to be very careful on their underwriting side, having strong discipline and I think there's a lot of evidence of that, that I could find.

In particular, they have stopped growing basically now, 2015 they haven't grown, this year they grow a bit, but that's due to acquisitions. If you take everything out, they are actually quite disciplined. So, I have full trust in that business, and at this stage, I don't think we need to change anything drastically just because of these two losses.

William Hawkins

It summarizes that it does sound like you're picking a small bad luck than anything you need to address.

Christian Mumenthaler

Yes.

William Hawkins

Okay.

David Cole

Well, let me pick up the second question on capital management. The first thing is just to reiterate that the way that we've expressed this in the past continues to apply today. I'll say that really just to underline what we hope will over time, really we've seen is consistency. There is no commitment indeed to future share buybacks, even the possibility for 2016 is subject to how our capital position will develop during the course of the year as well as the opportunities that we would see to invest it back into the business at acceptable returns and that's also in line with what we said in the past.

There is no doubt that if you just look back over the last several years, absolutely, correct, we've I think managed some extraordinary profits off of our P&C Re business. Even in the first half of this year, notwithstanding the fact that pricing has been under pressure, given the loss burden so far in the first half, ROE for the business is still a very respectable 13.7%.

But in terms of forward-looking comments, let me just reiterate our approach which is of course to maintain the financial strength, to maintain the regular dividend, we are able to increase the regular dividend whenever we are successful in investing into attractive opportunities in the business. That takes precedence over additional share capital repatriations. But still when we find ourselves sitting on this excess capital that we don't really believe we'll be able to reasonably deploy within a fairly short period of time than we look to give it back and that takes place in the first instance of course through the dividend, but then as an additional tool we have the authorization which needs to be renewed in principle every year, we have the authorization from our shareholders.

So I would caution about penciling in these things, we said that before there's no difference today than what I've said about that in the past. We'll continue to watch how the business develops, our capital position develops, some opportunities to invest develop and later in the year if we come to the conclusion that, if at all we're going to be sitting on this excess capital, then we'll come back to the market with some further communication around the buyback.

William Hawkins

Thanks, guys.

David Cole

Yeah.

Operator

The next question is from Andrew Ritchie, Autonomous Research. Please go ahead.

Andrew Ritchie

Hi, there. I'm actually just following up on Williams' question just on capital deployment. The first question, David, year-to-date you've seen very strong growth in the business, three bespoke transactions. Is that still sort of diversifying growth because obviously it's been in casualty lines associated with the incremental economic capital required or SST capital required hasn't been that significant or we are at the point where it's no longer diversifying because casualties sort of reached 50% of the book. So may be just comment on the capital intensity of the 18% growth year-to-date.

And second question linked to capital deployment. You are very confident that Guardian is going well, that's now integrated and we're at a point now where you'd be comfortable looking for further deals in the UK, if the business ready to do more deals, we obviously saw some press commentary about third-party capital, which I think you commented on in the press, maybe for Christian if you just remind us again what your attitude is to third-party capital in urban re and this type of further deals?

David Cole

So, let me pick up the first one, Andrew. Yes, you're right, up until now, the additional casual business that we've been writing has been more diversifying anything else that of course, will not continue forever particularly if we continue to, on the one hand, grow that line of business while we are taking a little bit of capital off the table and the windstorm, property nat cat area. But so far it actually has been – growth hasn't really overall across the group required a lot of additional capital, our capital position remained strong. You've seen off course all the dividends that come up to the Group, but also on economic basis, obviously, we have some volatility in the marketplace, but our capital position allows us, I think, to carry that volatility quite nicely. So, so far that additional business mix development hasn't really taken a whole lot of additional capital. Christian, for the second.

Christian Mumenthaler

Yes, yeah, I mean you saw our reaction which was basically that we wouldn't comment on the market rumors though, not surprisingly. I think they said, we said at the Investor Day last year that we would be exploring options to have other capital in that business. And I think the main reason is that it's clearly a very interesting business with potentially a lot of growth potential in particular now the environment you see, I think, from all of our segments, that could be actually one where there's a lot of interest.

You see tons of capital would love to enter, but doesn't get access, because there is a regulator here who will be worried to give it to them, there is a client who don't want necessarily to give this to hedge fund or private equity group, et cetera. And at Swiss Re in the middle, which has all the knowledge, the capabilities and everything, but potentially not all the capital to do significant transactions in the space. So it's all about this puzzle and how to solve it and I think there could be interesting opportunities and we're going to continue to explore these opportunities.

Andrew Ritchie

And Guardian is sufficiently integrated now that there wouldn't be a lot of risk in buying another book, is that fair or?

Christian Mumenthaler

Certainly, Guardian is on track, right, and you have to think about the lead times of anything. Obviously, if we found shareholders for the existing book that's not distracting anybody from a further acquisition. If it is about further acquisition, it is always a lead time of at least six months, if it's not nine months. And I think it's a separate legal entity, and you do Part 7, you can also park it for one or two years or three years and then do it. So, I don't think we're, I'd say, limited in doing a transaction in view of all the time lines, but the integration is not finished, but if I think about all of these pieces I think fundamentally we can discuss about other transactions at this stage.

Andrew Ritchie

Great. Thank you.

Christian Mumenthaler

Thanks.

Operator

Our next question is from In-Yong Hwang, Goldman Sachs. Please go ahead.

In-Yong Hwang

Get back to me [indiscernible] questions. My first one is on the large transaction that you've been seeing. I was just wondering from the demand curve, what is driving these deals, are they very much client specific issues, which you see a common theme such as regulatory changes for the larger deals that you've done in the last year or so?

And my second question is on the Life & Health, there is a comment in the presentation about an adverse experience in the Americas, just a bit more detail on what that is because I think one of your life reinsurance competitors in the U.S. has reported quite good U.S. mortality strengths. So, yeah – thank you.

Christian Mumenthaler

Yeah, so let me take the large transaction bit. There were various motivations, but I think the common pattern is when you have a new CEO, new CFO taking over, they look at the whole portfolio, they look at what kinds of ROE they get from all bits and pieces, they have new plans to grow in certain areas, and they like to free up capital in all the areas, sometimes even if it's a loss, sometimes without generating IFRS or cat loss.

And then these transactions themselves can be all kinds of things, so it could be adverse development coverage for P&C reserves, for example; it could be a going forward quota share that takes out business that has a high combined ratio, if that's what pauses them; it could be a nat cat protection over several years or in aggregate on the nat cat programs, and aggregate meaning the program that adds up all the loss in the year and it's the sum of small losses in a year exceeds certain amount we pay.

So for structured solutions that are very specific to the needs of a company, but generally it's for people who want to free up capital or take out volatility, it's not so much driven by Solvency II, let's say, or regulatory regimes at this stage, one exception to that is the big Life & Health transactions, they are sometimes driven by that.

In-Yong Hwang

Sure.

David Cole

Let me pick up the second question about the experience from the Life & Health side. This one quarter doesn't really say a whole lot. You made reference to some other players who've referenced some positive experience. I think if you look back over the last couple of years, more often than not, we've also had relatively speaking positive experience on the mortality mobility side. This quarter, we had a little bit less positive experience versus expectation, but there is no real trend here. The underlying business continues I think to perform in a way that gives us comfort regarding the – through the cycle type of return, we had 10.1% ROE this quarter, notwithstanding a higher equity base and notwithstanding some periodic adjustments we are just going through and looking at the valuations and as on top of that, the quarterly negative experience versus expectations. So, I don't see anything in here that suggest something other than just a random volatility.

In-Yong Hwang

Sure. Great. All right, thank you.

Operator

The next question is from Vinit Malhotra, Mediobanca. Please go ahead.

Vinit Malhotra

Thank you very much. One on P&C and one on Life, please. On P&C, we will be looking at these nat cat pricing and noticing a lot of comments in the industry that's pricing is stabilizing a bit. I was a little bit surprised to see that you're saying now that we are reducing nat cat in the U.S. [indiscernible] renewal. Could you just comment a bit about is this in your view the right time to reduce the U.S. nat cat? So that's the first question.

Then on the Life & Health, obviously, we've seen the turnaround in Life & Health as a segment. But just going one step lower into the segment Life & Health separately, I noticed that health has shown some of the adverse effects that In-Yong just discussed with you and the health EBIT is actually a bit lower than the recent history as well in this quarter. So just if you could comment once again in 1Q, you changed the ROE target definition from the old $5.5 billion equity base to current equity base, but equity base has again gone up by $1 billion or so in this quarter. So in this whole context of health being a bit weak-ish depending on model updates and changes, you see 10% to 12% ROE on a new current ROE still in place? Thank you.

Christian Mumenthaler

I'll start with the nat cat, while the others think how to answer the health questions. So, I mean, when people say prices are stabilizing, I think that's a nice description for further decreases. So, from a mathematical point of view, I would say, the second derivative is turning positive, but not the first one, which means that the decline of the decline is not happening anymore. So, instead of more of a minus 10%, you now have minus 3%, or minus 2%, or minus 5%, but it's still negative.

And as you can see in our long-term price adequacy of 102%, we cannot afford much more, right, we are hitting the target of where we stop creating value for shareholders. And so I absolutely told the team already in January, but now although preparing for the renewal, if prices go down further, even if it's smaller amounts that we should scale back on the small business further, we have already scaled back 7%, we've scaled back some of the U.S. nat cat, and we will scale back further if necessary, and I think it's the only right thing to do. So it's a question really of if the margin is very thin, even a small decline makes it really uneconomic and we should be very consequential in that. On health, I don't know it's…

David Cole

Yes, Life & Health. Let me just first start with the second part of your question, which is about the equity base, you're absolutely right, whenever we were at – this is to say, in the business doing the work that we had identified back in 2013, we said – we thought that by 2015, we'd be able to generate a ROE of 10% to 12%. So we're completely uncomfortable with what may happen with interest rates over that period time, so we settled – fixed the equity base at that $5.5 billion. Of course, we proceeded to implement those different actions, continued to write good business, put the right asset mix in place, dealt with some of this pre-2004 issue in the U.S. and then also finalized with putting the right capital structure in place for the segment.

Now, we're couple of years beyond that. I think 2015, we were very pleased with the result, also through 2016, we have an ROE of the quarter 10.1% but for the half, it’s still 12.6% I think off the top of my head. If you look more specifically, indeed, the equity base has gone up, but we said that we thought the 10% to 12% would still be an appropriate target, independent, if you will, somewhat of the equity base, I guess it's not without risk, that statement, but we think we also need to be able to give some sort of sense of comfort – confidence to our investors.

The health results in Q2, actually, there were some updates on the assumptions and valuations of course had a negative impact in health. The actual experience for health in Q2 was positive versus our expectations. So I certainly would not see something there to indicate a trouble in terms of performance going forward. Just to reiterate that 10% to 12% is a through-the-cycle target, we're not going to hit it every quarter, there will always be some volatility also in the Life & Health business.

Just take a second to think about the absolute magnitude, the size of our in-force book as we go in order to just completely rigorous cost basis going through our portfolios on the basis of new data, on the basis of reviews of our model, assumptions that made from time to time need to be adjusted. There's always going to be some volatility, but we feel comfortable that the book as a whole has a good quality and the underlying performance will continue to meet our expectations.

Vinit Malhotra

All right. Thank you.

David Cole

Sure.

Operator

The next question is from Sami Taipalus, Berenberg. Please go ahead. Mr. Taipalus, your line is open.

Sami Taipalus

Hello. Afternoon, everyone. Can you hear me?

David Cole

Yes.

Sami Taipalus

First question on your liability business and some of the stuff that you've got in your reserve disclosures. If you look at the ultimate loss ratios and they tend to be in sort of mid-80s to 90s on liability reinsurance. And if you add on the expense ratio with that, you get to probably around 120% for recent treaty years in terms of ultimate combined ratio. I just want to [indiscernible] about sort of the combined ratio makes sense in the current interest rate environment because again that’s a book that you would be growing quite a bit recently and I appreciate what was said before, about it's being relatively capitalized when you're diversifying. But it seems nevertheless like this pretty low level, that was the first question.

Then the second big thing I wanted to ask about, was the reserves and costs at this time, even if you strip out those two major large claims that you flagged, there still seem to be a little bit of adverse PYD in Q2 and there was a bit of adverse PYD in Q1 as well, which is quite a sharp turn round from what we were seeing in the last year and the year before that. Is there any trend there or is this just sort of random volatility? Thank you.

David Cole

So on the second question, there is a small little bit of PYD exclusively. These two specifically also a little bit challenging in that regard because they happened in 2015 and we only got information about it this year, it shows up as a PYD, but in the general context, the way we discuss PYD somewhat of a different animal.

If I look back over the last couple of years, we've had years where that's been positive, years where it's been negative, PYD, I'm talking about, there is a little bit of a quarterly volatility around that. But if you strip out this $100 million, what it was – $103 million coming off of these two losses, a meaningless figure for Q2 for corporate disclosures and there is – I don't think there is really a story there.

But I'd have to say, you’ve puzzled me a little bit with your first question, and I don't exactly recognize some of the figures, but maybe we can take it offline to go into a little bit more detail about the specific line or specific year that we're referring to, but just in general, listen, we recognize it from time to time the combined ratio on a reporting year basis can sometimes even go above 100% and it's still be an attractive book of business to write. But, I don't think it would be appropriate sense that you may have somehow we're sitting on a serious lines of business or reserves where we're expecting an ultimate loss somewhere in the range of 120%. I think we can follow up if you don't mind offline, but I don't recognize that.

Sami Taipalus

It's really isn't anything complicated. If you look at the slides in your reserving presentation, I mean, I may have misread this, but where does the ultimate loss ratio, it's kind of between 85 and 90 roughly for all [indiscernible] except one since 2007 and your normal expense ratio is around 30% to 35%. So if you add those two together, you get to somewhere around 120%. So, I mean, that seems quite a bit above 110%, so I'm just wondering why.

David Cole

It could be individual, year, I mean, I can pick any one of the different slides, I happy to go through it in detail, there are some years of course in soft markets, we do have ultimate loss ratios in excess of 100, but if you look at the overall book across the different accident year, treaty years, you'll see I think a very consistent figure below, the ultimate loss level of 100% on the book.

So I really – there may be individual lines, individual years that have experienced of course the ramifications of soft market environments, but one thing I can tell you is that consistently across our book with the exception of recently some updates on the motor side, and, of course, the ongoing story around asbestos in United States, particularly we remain I think very comfortable with the way the existing reserves are developed and the overall level of prudence associated with that.

As I mentioned, typically we sit somewhere between 60% and 80% of the best estimate range. Notwithstanding the fact that over the last couple of years for different reasons, we've had some prior year positive development, actually in the overall positioning within the range we have not come down. So we've basically stayed flat or even in some lines of business has moved up a little bit. We're happy to follow up afterwards, if you don't mind.

Operator

Our next question is from Thomas Fossard, HSBC. Please go ahead.

Thomas Fossard

Yes, good afternoon. One question left on my side, which will relate to the other rates you've got in mind regarding any, I will say, big deals or acquisitions or ability to deploy excess capital. I've got in the back of my mind, I've got an 11% other rate, which probably dates from a couple of quarters back. Is there any change in your thinking of how much is your – although right now are you still looking for 11%, or has it changed in light of the new interest rate environment, any update on that? Thank you.

David Cole

A quick answer, no, it hasn't changed. Obviously, that's the kind of thing from time to time you may have to review, but we continue to believe that for large allocations of capital not on every individual transaction that we do, but certainly for large allocations of capital that having that type of rule of thumb, if you will, 11% ROE, it's on a U.S. GAAP basis, is not a bad thing to have, of course we look at transactions using a number of other metrics. And as you correctly indicated with your question, at some point with low interest rates and overall lower available returns, it may not be the appropriate number to continue to apply. So for the time being, as Group CFO, I continue to apply it rather relatively rigorously.

Christian Mumenthaler

I think maybe one thing to add is, if you write – that's on a GAAP basis, but on a PV basis, you could have the large casualty transactions where the first year you have to set the reserve relatively high and then the interest rates coming through for seven years. So it means 11% overall on a PV basis, not necessarily the first year. Every large transaction, we have a document and in the document, we see the whole EVM view and the whole GAAP view over time year-on-year and it has to meet this 11% hurdle.

Thomas Fossard

Okay. Can I take from your comments that the transaction – the last transaction with AIG at the start of the year was based on these type of metrics, because I think there were some comments in the market saying that potentially you may have taken this deal on really low profitability levers, so typically the size of the transaction with AIG could pertain to this kind of other rates?

Christian Mumenthaler

I have to say we're extremely happy with this particular deal, but we look at different metrics that we look at it – we don't look at accounting year combined ratio being great every single year. We look at overall on an economic basis, right, EVM and also GAAP, how will this accumulate. So what is the – if you want the PV combined ratio, the present value combined ratio and that was attractive for that particular deal. So the clients are [indiscernible] different capital regimes, at certain interests and I think that's where you get interesting transactions win-win transactions when two companies have different KPIs that try to optimize then and they are in different regimes, right, then you have interesting opportunities. And so, I'm sure they're very happy with the deal and we are very happy with the deal and that's possible.

Thomas Fossard

Okay. Thank you.

Operator

The next question is from Philip Kett, Macquarie. Please go ahead.

Philip Kett

Hi, good afternoon, everyone. Just one final question from me. On the Life & Health Reinsurance business, there is a comment in the presentation about successful renewals in China and Australia and is that now a significant portion of the business? Thank you.

Christian Mumenthaler

So, it's not that significant, no, because you have some renewal business also in Europe by the way, but that's one, one, it's not a big part of the business, not driving it.

Philip Kett

Thank you.

Operator

[Operator Instructions] Our next question is from Frank Kopfinger, Deutsche Bank. Please go ahead.

Frank Kopfinger

Good afternoon, everybody. I have two questions. My first question is on the P&C Re combined ratio. Could you elaborate a little bit on the underlying trends and I'm thinking especially about either on your adjusted by the way from the 95.6% that we had in Q1 to 102% almost now in Q2, but you could also to – you strip everything out like the reserve releases, nat cats, man-mades and so on, do you see the hick up in Q2? Could you walk us through this increase, what the drivers are here? I am thinking especially on – such as by the shift mix, by seasonality and also by the expenses if you look on the combined ratio. And then my second question is on your buyback. Now that you have upstreamed $3.5 billion of dividend to the holding and generated $1.9 billion in profits and still left over of $850 million of nat cat budget, what could derail your really now – to the buyback for next year or this year?

David Cole

Listen, there are all sorts of different scenarios about what could happen in the remainder of the year that may lead us to conclude that there are better uses of capital than buyback. It could be losses that occur, real losses, so independent of what we have in our budget, windstorm takes place somewhere in the North America, somewhere in Europe, earthquake somewhere around the world. It could be opportunities that arise to invest capital.

So, I think and just go back to my earlier comment about the way in which we think about capital and the hierarchy and we think about it. But as we get toward the end of the year, if we find ourselves sitting in a situation where the amount of capital we hold is in excess of that that we think we should reasonably hold to continue to be able to respond to the opportunities that arise, then we will think about the best way to return that excess capital to our shareholders.

As for your first question, really not a whole lot more I can add. There is seasonality, of course, every individual quarter is a little bit different, our business mix continues of course to evolve a little bit, and also business that we've written in previous periods, previous renewals now flow their way through our P&L in terms of earned premium and loss expectations. We've walked you through earlier, a little bit, the way that we think about our large nat cat budget and the fact that it's not exactly linear throughout the year.

We've provided with some information about the actual versus the expected nat cat in the prior year impact. I don't really have a whole lot more to add in that in terms of granularity or insights, other than I would just caution you that the 99% estimate is an estimate for the full year, a number of things that can move to change that of course in the year. We still believe as per two quarters that isn't an appropriate number, I think the actual adjusted CRR adjusting for the expected versus actual and prior accident year development coming in at just under 99%, so just shy of the 99% estimate is at least some indication that the number may not be too far off, but time will tell.

Frank Kopfinger

Okay, thanks.

Operator

Our next question is a follow-up by Vinit Malhotra. Please go ahead.

Vinit Malhotra

Thank you for taking the follow-up. I just wanted to just check on this two losses in California that we are talking about today. How does this – if we normally look at the loss, I mean if the loss occurred in 3Q 2015 or 4Q 2015, then should it not be the case that it should be reserved to some magnitude back in those quarters? I mean I just want to understand how this reserving philosophy works, if you don't mind.

David Cole

No, that's perfectly fair. And the short answer to your question is, yes. The specifics of these two losses however mean that both the responsibility for the losses, these were not property losses, these were casualty coming through liability. So the determination of responsibility for the loss and also determination of the magnitude of the loss didn't actually take place, it wasn't possible until effectively in Q2. So it wasn't possible at the time that the event actually started or occurred.

But in principle you're absolutely right, I mean this is one of the things that makes us somewhat unusual. In fact, we have two of these now in the same quarter is even more unusual, rest assured we looked into quite closely to see as Christian indicated, there is some sort of trend and the only thing that we can really see is the fact that both of them are in California, but other than that completely unrelated to each other. The circumstances just developed in such a way that we didn't have a view of the loss back in the quarter when the event occurred. Now it became quite clear to us specifically also this culpability, the responsibility issue during the course of Q2 of this year.

Vinit Malhotra

All right, thanks for the time.

David Cole

Sure.

Operator

Our last question is from Vikram Gandhi, Société Générale. Please go ahead.

Vikram Gandhi

Hi, it’s Vikram Gandhi from SocGen. A couple of questions. One is on the amount of short-term investments and the cash that you hold. If I look at the total of these two elements, the short-term and the cash, it's about $17 billion plus, I appreciate it's come down a bit from the last quarter, but it still looks substantial. So any thoughts on how you intend to deploy this cash and transit into some form of a running investment income would be helpful.

And the second is related to the Life & Health Re business. About three years ago you did a cleanup of the book particularly with regard to the – via T and PLTs. Can you give us some comfort around the PLTs? So let's say a couple of years down the line the T10s and T15s moving to T15s and T20s, we wouldn't have another clean up exercise, I think, in a year or two. So those are my two questions. Thank you.

David Cole

Yeah, thanks. So I'll take the first and Christian maybe pick up the second. So you're right, you're looking at slide 29 and suppose you see the cash and short-term investments, we still hold a good cash position unless we more or less match in terms of overall asset liability match and we're currently I think minus $2.9 million DV01. We have been actually moving some cash into government bonds as you see that number has gone up a little bit, as well as in the short-term investments, which are typically also this short-term government paper, but you could imagine non-government paper with a negative yield, but government paper that still has a positive yield albeit those papers are also becoming fewer and far between and the yields are becoming a little bit less.

It remains a little bit of a quagmire. We have no intent to start putting a lot of cash in vaults or cash in mattresses or anything of the sort. We're looking for good quality credit. We want to maintain the overall asset allocation ranges that we previously indicated. Actually during the course of Q2, we took a little bit of risk off the table with the equities and alternatives. We continue to look for opportunities to invest in high-quality assets. But it's hard for me to say exactly where that cash will go, we're not going to go chasing yield, that's for sure, continue to hold a good cash position, no doubt at least for the foreseeable future.

Christian Mumenthaler

Yes, in terms of PLTs, this post-level term issue in the U.S. in our old book of business, I think, nothing has changed over the last two years. So it continues to be a drag, it will be a drag going forward. We have a whole team mitigating it. So that's I think what we talked about at the time of Investor Day and that's going quite well. The team by working together with the client can mitigate it by having basically more people staying after PLT period with the client, which is better economically for the client and for ourselves, but they can't mitigate it completely away.

I think the relevant thing for all of you and our investors is that we have taken that into account into all of our projections in the 10% to 12% ROE we want to achieve. So it just means we have used the time and continue to use the time to add on more good business and do large transactions where we can, so that we can stay within this 10% to 12%. So, if I could, if I was a magician, I could get away with that business, I would immediately get rid of it, but it's not possible and so we just work with it and continue to hold in-force book.

Vikram Gandhi

Okay. I appreciate that. Thank you.

Philippe Brahin

Thank you. This is Philippe Brahin, again. So we come to the end of our Q&A session. Thank you very much all of you for joining and if you have any follow-up questions, please do not hesitate to contact any member of the Investor Relations team, and Sami, we'll follow up with you on the P&C reserve book as David mentioned. So, thank you, again, everyone for participating today.

Operator

Thank you for participating, ladies and gentlemen. You may now disconnect.

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