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Executives

Eric Schuh – Head, Investor Relations

George Quinn – Chief Financial Officer

Analysts

Spencer Horgan – Deutsche Bank

Andrew Ritchie – Autonomous

William Hawkins – KBW

Michael Huttner – JPMorgan

Thomas Seidl – Sanford Bernstein

Andrew Broadfield – Barclays

Stefan Schuermann – Vontobel

Frank Kopfinger – Cheuvreux

Vinit Malhotra – Goldman Sachs

Maciej Wasilewicz – Morgan Stanley

Jean-Francois Tremblay – RBC

Fabrizio Croce – Kepler

Swiss Re (OTC:SWCEY) Q1 2012 Earnings Conference Call May 4, 2012 3:00 PM ET

Eric Schuh – Head, Investor Relations

Good afternoon and good morning everybody and from Swiss Re side welcome to our First Quarter 2012 Results Conference Call. So, in Q3 last year, we have changed the format of our quarterly results calls. The new format contains a video presentation by the CFO, which is available on our website at 7 AM and the call that we are having now that focuses solely on Q&A.

I am here with our CFO, George Quinn who will give you some opening remarks before we turn to the Q&A. George?

George Quinn – Chief Financial Officer

Thanks, Eric and good morning or good afternoon to you on the phones. I’ll keep this really quite short. So, as you’ve seen from the figures we reported this morning, we've had a good start to 2012. We have strong performance across all of our segments albeit one that's only boosted by an absence of natural catastrophes and some realized gains, but nonetheless, our underlying performance for the quarter is strong.

I particularly want to pick out and highlight the renewal today. We have taken the strength of our client franchise, our capital and underwriting strength and combining them to achieve an excellent outcome on the April 1 renewal. As again, you've seen this morning we've got substantial improvement in margins and significant growth, as you would expect to see against this backdrop of rising prices. There are some challenges that we’ve yet to face, but there is no doubt in my mind that the firm has headed in the right direction and the results did further evidence that we’re headed in the right direction as far as our financial targets are concerned.

With that I’ll put you back to Eric.

Eric Schuh – Head, Investor Relations

Thank you, George. So, operator, we’d like to turn to the Q&A and in the usual way could people please restrict themselves to two questions each. Operator, can we please take the first question?

Question-and-Answer Session

Operator

Yes. So, the first question is from Mr. Spencer Horgan of Deutsche Bank. Please go ahead sir.

Spencer Horgan – Deutsche Bank

Very much, good afternoon. Two questions please. First one is just coming back to these renewals, George you mentioned the price adequacy was up 17 percentage points, which I guess is a function of three things, i.e., the price probably the business mix or I guess you’ve moved into more higher-layer, non-proportional business? And also a reduction in the assumed seismicity in Japan, and I was wondering if it is possible to sort of quantify the impact of each of those three things within the 17 percentage points and to the extent that you are writing high-layer non-proportional business, presumably that's consuming more capital? I wonder if you could give us a number in terms of the increasing capital committed in the April renewal? I am hoping that counts as one question. Second one is therefore is on Corporate Solutions, I thought the target combined ratio for the Corporate Solutions near time was 101% and yet the slide 9 shows the adjusted number as 95.8% for this quarter. So, I was just wondering what else was going on in there? Thank you very much.

George Quinn

Thanks Spencer. So, on the first one we don’t break apart the – I guess price versus business mix. So, we look at the total economic improvement in price adequacy. So, I can't really break that one out for you. I can't break the seismicity piece, so I think just for everyone's benefit last year in the immediate aftermath of the earthquake in Japan we added an adjustment, that's actually increased the loss cost in the short-term for the risk of aftershocks. That will decay over time. So, over the 17 points, 4 points comes from the release of part of that adjustment that we made a year ago.

On the capital side of things, from an economic capital perspective, which is the main constraint that the firm will typically face, this is one of the peak perils from a nat cat perspective, but it's not as large as the two largest, so European windstorm or Atlantic hurricane?

If you look at the additional capacity that we have deployed today, I think I understood, I look out the number. We've deployed about 40% more in capacity. I think if you translate that into a capital impact, it would be much, much less than that for this peril, because it partially diversifies. So, from a – I think if you look at it from a probably the simplest, if you switch to S&P, S&P's going to be the easiest way to look at it, because it's factor based. I think if you take about half of the premium growth, I will give you some idea of additional capital deployed. So, the additional capital requirements for this business, this renewal are really, really quite small.

When the target combined ratio for Corporate Solutions, so, you’re right we gave guidance for the group overall for all the P&C business of 94%, which is split 93 for reinsurance and an expectation of 101 for Corporate Solutions, just given the nature of what Corporate Solutions does I think you have to expect that there is more, I hate to call it good or bad luck, but more natural variability beyond the peer and that kind of component. So they’re obviously significantly exposed the manmade losses and that will also drive short-term variation and the combined ratio. So we don’t see any reason to change the guidance that we gave and I’d simply look at the five points of difference so it’s well within the natural volatility that you can expect to see from this business given the types of risks that it writes. I expect the combined ratio to be volatile going forward.

Spencer Horgan – Deutsche Bank

Okay, so it’s just a small request maybe, is it possible to split out the impact of large claims on the combined ratio in nat cat in future quarters just to reconsider GAAP that’s picture of the underlying?

George Quinn

Without making a commitment we’ll have a look.

Spencer Horgan – Deutsche Bank

Thanks.

George Quinn

Next question please.

Operator

I apologize. Here is the next question it’s from Mr. Andrew Ritchie of Autonomous. Please go ahead, sir.

Andrew Ritchie – Autonomous

Oh all there I’m just to, three or four questions I think, first of all if I look at your SST ratio I think you’re saying at the end of April it was 213 and that projected number for the end 2012 that compares to 210 I think it was at the end of October projected 2012, I’m just thinking I guess the reason I’m asking and also combined with sort of year-to-date you’ve generated $1 billion of that earnings, you have also raised $1 billion of contingent capital, it looks to me that essentially based on the SST projections and sort of year-to-date you haven’t met actually deployed any excess capital or rather the projected SST suggest that based on your plans what you’ve renewed what you think you can earn. You are actually not consuming any capital, any excess capital as such if you sort of follow my thinking. If you just run us through it’s not really the case. Second question simple on Admin Re on that the dividend but it, all the cash paid out, is that something we should expect every quarter, is it a lumpiness to that and is that represent cash back to the group or is that cash actually dividends or is it some internal cash flow?

George Quinn

So, on the first one I think you’re almost right. I think the position is actually, I am not sure whether to say its better or worse. So, the one important point about the SST ratio is that the first report that we filed on April is essentially at the beginning of the year view. So, it takes into account of additional risks that we expect to incur on the underwriting side but it wouldn’t take into account market movements beyond the beginning of the year. So I would actually expect that all things being equal there would be an improvement given the market recovery and toward the improving equity market and the impact of spreads. So, the SST ratio if we redid it today would probably be slightly higher than the 2.13. So I think your summary is right. The question is why given the fact that we’ve taken more risk on underwriting side don’t you see it and that’s mainly explained by some relatively modest but positive model changes that we’ve got in Q1. So, we’ve absorbed some capital and that’s largely been offset by positive model adjustment.

Andrew Ritchie – Autonomous

So in other words then you are growing but you are actually excess capital in an economic view hasn’t gone up?

George Quinn

Correct.

Andrew Ritchie – Autonomous

Okay.

George Quinn

On the Admin Re sides just to make sure I understand question correctly. I think you have the gross cash Andrew that you see.

Andrew Ritchie – Autonomous

Is cash equal to dividend out and it seems – I think you said at the Investor Day, 200, 250 was a kind of targeted dividend extraction run rate. We had almost a bit more than in the quarter. So is this something that hands every quarter or is there some lumpiness to this?

George Quinn

Yes, the way this thing works is the gross cash that you see in the chart is the internal cash that Admin Re generates, due to pay a dividend to the group and Q2. So shortly of $175 million but the gross cash number is an indication of what they should have to pay us when we get to the end of the year. But I don’t expect take a quarterly dividend from Admin Re.

Andrew Ritchie – Autonomous

Okay, I understand there is a timing difference between cash and dividends. So the dividend 175 would reflect last years dividend reflecting last year kind of thing, is that explains the lag, right, got it.

George Quinn

Great, as we think about.

Andrew Ritchie – Autonomous

Okay, thanks.

George Quinn

Thank you.

Operator

The next question is from Mr. William Hawkins of KBW. Please go ahead sir.

William Hawkins – KBW

Hi, thank you. Just one question George. The prior developments that seems to be so good in the liability book, during your formal words you flagged 2008 and prior for Europe and the U.S. Could you possibly maybe be a bit more precise. I guess you’re talking mid 2000 business rather than pre 2001 and what’s the split between Europe and U.S. Just a bit more detail on that would be grateful? Thank you.

George Quinn

Okay. So the – I think that probably I should have said, prior to 2008, as you would expect there is a not a lot of 2008 development and I slightly misspoke. I think if you look at the various lines of business, we'll start with P&C Re, property, I guess we’ve highlighted the fact that we actually have strengthening in there and that’s driven by the increases in lost estimates for New Zealand and Thailand. On the casualty side, there is about $70 million of positive experience driven by better-than-expected claims experienced generally across liability everywhere. So, for the first time we see the U.S. have an impact but the numbers are relatively more just and its partly offsets by small amounts reserve strengthening for Italian motor and a smaller yet gain on accident and health. On specialty was actually a larger driver in Q1. So, we got nearly $70 million of proven on specialty side mainly driven by engineering and aviation and space. Aviation and space tends to be a shorter tail lane, engineering can be quite long tail, so we maybe adjusting underwriting yields five or more years ago from engineering group.

William Hawkins – KBW

If I may just clarify, George, in the casualty book, the pre-2008 releases, that’s business was sort of from the middle years of the decade rather pre-2001, is that right?

George Quinn

Okay, right. Yeah so..

William Hawkins – KBW

Yeah.

George Quinn

It's typically the usual suspect. So, its typically pre -- I’m sorry 2003 to 2006 still by far the best year for casualty.

William Hawkins – KBW

Yeah, okay, great.

Operator

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

Michael Huttner – JPMorgan

Yeah, thanks very much. First question is do you have in your incentive of all you get paid a cap. In other words which you have very good Q1 and lesser year develops more as kind of flat on the 17 April. It’s actually, we are looking at a numbers $3 billion because a little bit above your $8 a share you show in the slides. Is there some mechanism which says, well, now, above loss of share, we don get paid so, we don’t sell through? That’s my first question. And the second is on the industrialized I do remember I'm sorry Corporate Solutions the head of industrial lines mentioning in several times in 95% was right number that we're aiming for, after 93% on completely, obviously didn’t follow something on that and I just wonder whether you could help me out 95.8 within that 95 but continue that? Thank you.

George Quinn

Okay, sure. Just they check on the first question, I think you asked me, we didn’t get paid for the earnings but we did not show it. But I misunderstood you, misunderstand you.

Michael Huttner – JPMorgan

Yeah, that’s correct.

George Quinn

So, that would be inappropriate.

Michael Huttner – JPMorgan

The competitors work on that basis?

George Quinm

Okay, so we don’t the various caps and the incentives so, as we get paid or capped. But we're going report is cover will be believe event. I think as a management team would be interesting Jeopardy would if we started to adjusted financial reporting according work. We wants to be paid for the—the various schemes that we have whether it’s the cash annual performance incentive over the long-term incentives that some of the senior management benefit from (indiscernible) caps, about as no impact on were reported as what we believe we've end in the quarter for the year. On the second issue on market solutions of the seasons, I think the reason for conclusion, confusion. Is that when we had the Investor Day we showed two numbers, so we showed you Corporate Solutions as that is, which is the basis for the 101% gains on the combined ratio. And at the same time, we’ve also shown you what the complete contribution of Corporate Solutions is to the Group today including the business that it seems to Reinsurance. To give you a sense of what we look like three or four years from now when it’s reached the steady state and the reason for doing that is that when we prepared the new segments, Corporate Solutions did not recapture business that is previously exceeded to Reinsurance typically for carrier management purposes. So, that 95 that you’re referring to that was more like a forward-looking view or a view the entire contribution that Corporate Solutions has to the group today, but I'll take some time before the standalone numbers for Corporate Solutions actually show that.

Michael Huttner – JPMorgan

Understood. Thank you.

Operator

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

Thomas Seidl – Sanford Bernstein

Yeah, hello. Good afternoon, everyone. Two questions. The first one on the life and health reinsurance chart number nine, the waterfall chart, I was just wondering if you could give us some guidance on the outlook on the mortality and on the reps changes if they are fixed not, if they will state or are we going to see some ups and downs and what are the drivers will see ups and downs? And the second question is on the contingent capital, I think you’re spending some 7% or 8% of this the year, I just was wondering are you planning to deploy this in new business this year or is it more that you’re going to replace other source of capitals? Thank you.

George Quinn

Yeah, thanks for the question, Thomas. So, the – I think you may help us, I just explain a bit of slide A1 and of course small table in the box. To see here summary of the mortality morbidity performance was expected the 32,000 and four year as business, the loss impact from that and the impact of more than assumptions. Let me give also the range and the average of the last 13 quarters. I think if I look at this that we have it, reason would be that, we've had a mortality or morbidity impact for the quarter that’s significantly above expectations in fact well above the average that we've seen over the last few years.

So you'd expect that on average we'd achieve something closer to the average. So we have a, not extraordinary profit, but we have a mortality impact that’s possessed use of the randomness of the arrival of claims instance of individual large amounts or lack of them will drive the reported quarter number within a fairly wide range, but the average is typically positive. So for that piece, I'd say that the life and health result for this quarter is higher than we expect to see. And for the pre 2004 U.S. business the lot spot you can see is negative typically it's negative. I think unlike the mortality and morbidity, which is more of a random walk and with that you can see a reasonable trend if you go back through the disclosures on the pre 2004 U.S. business, I wouldn’t take all the way back to the average, I think that we'll see this run negative I'll think through certainly this year may be next as we walk away over this particular book. So for these two I think there is some temporary positive on the mortality and morbidity side and I think that the U.S. business lot speaks is not permanent feature but you'll certainly see I think for several quarters to come. On the models and assumptions, I expect that to be an average of wish and I think the thing that we have to do as a management team is to narrow that range down on the models and assumptions so, that we don’t have a $140 million spread for an average closed to zero. That’s why I would use these figures, I hope that helps.

Thomas Seidl – Sanford Bernstein

All right so in future that means ever a bit lower I'd say operating income to assumes, yes.

George Quinn

Correct. So, I would restraint a bit, clearly for the mortality profit in the quarter.

Thomas Seidl – Sanford Bernstein

Yeah.

George Quinn

On the contingent capital sides, so, the caliber have been doing is really refinancing the some of the hybrid part of the capital base. We have a preference for this new model that you’ve seen is more expense than hybrids, but we think this is a much higher equity content justifies and as you see today, it actually ends up been reported as part of shelter equity. And overtime, this is part of the overall capital basis in the firm that is simply a refinancing activity well undertaking at the moments and once we reach our capital plan we’ll stop. But in terms of how we would use it, we view the entire capital base is fungible. So, we will deploy it anywhere where we think, we’ll get the appropriate returns.

Thomas Seidl – Sanford Bernstein

Okay, thank you.

Operator

The next question is from Mr. Andrew Broadfield of Barclays. Please go ahead, sir.

Andrew Broadfield – Barclays

Hi, good afternoon. Two very quick simple questions, Admin Re I think on your comments George this morning on video was to expect the break-even for the rest of the year I’m assuming that’s about nine months is the expectation, can you just explain to me again I’m sure you’ve done it lots of times. It’s just simply because of the expenses that you’re incurring that will offset any normal profitability or something else in there? The second just on the P&C renewals as well, so, the renewal economic improvement on the yields was I think 17 percentage points you said in April. But I guess as also some of your business and quite a lot of restructuring. So, it is fair to assume that the business canceled against the business that you’ve got new would probably be there or even above that level of improvement in theory, if nothing else?

George Quinn

Okay. So the - on the first one, you’re right. So my comment this morning was intended to reflect the remaining nine months rather than be a projection for the full year, but I guess it can work out given the combination of the two. I mean the reason for that, I would typically expect Admin Re, in it’s current form, while we do some work on it to have a pretty low ROE. So, I think I have typically said, low single digits. I can see some things coming up, expenses are one of them that will temporarily impact the ROE keep it even lower than that level and not just reason for the comments that I made this morning. I don’t expect, Admin Re to have a routinely break-even ROE. Obviously, there still some work to do by far to bring this to a level that’s more acceptable.

On the P&C renewals, ordinarily it would be very difficult for me to break the new business from the business canceled. You remember that we used to have that format, we still giving it, because it's quite hard to have a clear definition of kind of what’s the new business, what’s essentially the restructuring of an existing contract. But one thing I do know from talking to Matt Weber yesterday, because obviously, we were looking at what we’re seeing from competitors on price adequacy. And he made the point to me that one of the more profitable areas of what we’ve done on April 1 is private layers. So these would be new transactions, where we had a 100% reinsured of particular part of the program where we assess the price adequacy as higher than average. So I think in this case almost certainly the new business is a relatively big driver of this improvement in margins that we are reporting today.

Andrew Broadfield – Barclays

Okay. Just one another confirmation, I think from Spencer’s question as well. The capital allocated, it sounds to me like you haven’t actually increased dramatically the capital allocation because of diversification benefits and those other bits. Is that – was that the right conclusion?

George Quinn

It was.

Andrew Broadfield – Barclays

Thanks so much, please.

Operator

The next question is from Mr. Stefan Schuermann of Vontobel. Please go ahead sir.

Stefan Schuermann – Vontobel

Yeah, I have two questions. The first one is on duration management. Do you basically decrease your sensitivity to interest rates in the first quarter? I wonder if one now just taking 2.2 million or 5 at the end of the year? And just maybe to explain where it is happening, what segment? Was that in one-life I assume or were there any other changes in other segments? And then the second small question on restructuring cost, maybe just give us some more insight. You show $26 million of restructuring costs in Admin Re in the first quarter. Can you give us some indication what do you book for in Corporate Solutions?

George Quinn

And so on the duration management side of things you’re quite right so over already. The duration mismatch has reduced from a relatively small about $5 million basis point at the end of the year is $2.2 million for basis point at the end of the quarter. And some of this is actually relatively low of this is active duration management by the firm. A fairly large chunk of it, for example things like convexity in the portfolio and that’s all that will automatically move things and also as we update the portfolio clearly for the year end, we have the larger and more detailed part, the actuarial study, that actually shows that is change in the liabilities that has adjusted the overall duration gap for us. So we haven’t made a deliberate and active decision to substantially cause the duration gap and most of it, it happened naturally either because of convexity changes. All because of the portfolio updates.

Stefan Schuermann – Vontobel

No, that’s fair. Okay, thanks.

George Quinn

And on the restructuring side of things, so I think I know I sometimes refer to as restructuring, restructuring is not particularly a waste product. So, I think we have two different things going on in the firm. We've got Admin Re where we’re spending money to create a more simpler and more independent platform and a business that would run itself because a level of detail and focus that’s appropriate to Admin Re standalone business. At the same time we have Corporate Solutions and Corporate Solutions is hiring employees, opening new offices to create the footprint necessary for the profitable growth that we’re planning from Corporate Solutions.

I think if I pick Corporate Solutions, first, I would say that for the investment impacts over the first few years is probably add about two to three points to the expense and combined ratio over that period till we reach the hopefully steady state say three, four years from now when Corporate Solutions has kind of reached its targeted size. Obviously, the office opening is in the hiring of the staff but always precede the writing of the business, but I guess Galvagni and the team will manage this carefully. We’re not going to grow no matter what. We will only grow if we saw the possible opportunity and that may affect the facing of expenses. But so far the growth teams are reporting is in line with our expectation as is the increase in expense.

On the Admin Re side of things, so I think I tried to highlight here that I expected some of the additional cost that we are incurring not only in relation to the changes that we’re making in the way the company has managed internally but also in relation to allocate having impact certainly into the second quarter of this year. If I look at Q1 until the one off cost for about $35 million for Admin Re and I expect traditional one off cost for the remainder of the year to be quite slightly above that level so somewhere between say $40 million and $50 million still to come.

Stefan Schuermann – Vontobel

Okay thanks so much.

Operator

The next question is from Mr. Frank Kopfinger of Cheuvreux. Please go ahead sir.

Frank Kopfinger – Cheuvreux

Good afternoon and thank you. My first question will be on the running yield, the first quarter you said that its 3.5% and as you harvested some gains on the bond side and you reinvested in bonds I will guess that the yield is going down to, could you give us some indication about the yield of the reinvestments and where we should expect the running yield to go towards the end of the year? This will be an out discount as one question and my second question would go on the April renewals on the renewals overall. And as we are mainly talking about net cut pricing and price increases there, do you see also other lines that are currently improving or are you expecting other lines to improve or deteriorate?

George Quinn

So, thanks Frank. On the first one, you're completely right. So the fact that we have gains in the result for the first quarter, means of course that that’s going to impact the future running yield. I think to give you some more detailed numbers. If I look at the book yield of the net acquisitions in the quarter is about 2.2% and the book yield of the exposure is about 2.8%. If I look at – if I try and do the war for the walk for one to the other, that means the impact of the purchases tickets down by about 33 bps. The impact of the disposals has about 22 bps in the other direction. So, you have about net impact, you have about approximately 10 bps, that’s slightly more than I indicated for Q4. I think if you remember or we had some of the conversations that took place, I think Q4 had indicated that – I think for the year, I thought we are running maybe 6 bps a quarter.

We have more gains in this quarter. So, you expect to see a more negative impact on the running yield. Having said that the running yields over the quarter is fairly flat. So, the 10 bps that we lost because it’s the lower reinvestment rate and it’s partly offset by change in gains, of course, as you have seen today, we have a reduction on unrealized gains in the portfolio, some foreign exchange movements and some other changes in the portfolio such as the adjustment of floating rate securities. But I think that the – I don’t expect to see gains this level throughout the year, but we’ve had a 10 bps impact in the quarter. We had 6 bps in the quarter at the end of last year. So, if we continue this level you will see that kind of decline. So, we have 25 bps plus. But I expect the gains to reduce in terms of impact. And in fact, given the plans that we announced on the Investor Day for re-risking and depending on when David Blumer and the team started that process and depending on what interest rates are when we do that. It’s possible that in some quarters we'll actually have a positive impact on the running yields through that activity as we saw last year in fact in some quarters.

Frank Kopfinger – Cheuvreux

Okay.

George Quinn

April renewal, so I think the challenge with the April renewal is that obviously Japan dominates it and Japan has got a combination of the impact of the nat cats and the nat cat exposed businesses. I think as you have had already from market country are showing huge increases, but at the same time, again I think almost everyone is aware, Japan is the main source for the international reinsurance sector of the Thailand loss. Generally, everything in the April 1 renewal is moving in the right direction and it's only a question of speed, so obviously things that are nat cat exposed are seeing very, very significant movements.

I think if we look more broadly either side of the renewal and look at the activity that’s taking place. I think no surprise and they generally the nat cat exposed businesses are the ones that are moving most rapidly and we don't really expect that to change going into the July renewal. It's still the most constrained area. It's the area where I think both clients and re-insurers are cautious about how they deploy the capacity. And that’s the one that probably has the most attractive market dynamics. Having said that though, our belief is that if you look at the sector broadly, I think there are always areas you can pick out where you are not seeing the movement you would like to see, but generally the momentum on pricing in most areas has at least a slight positive to it and that's a trend that we expect to continue.

Frank Kopfinger – Cheuvreux

Okay, thanks.

Operator

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

Vinit Malhotra – Goldman Sachs

Hi, good afternoon. So, on the two questions, on the contingent capital George, you mentioned clearly why you did the thing, but why would you need to replace even a maturing hybrid, given that there is so much capital in the system already. So, that’s more a theoretical question probably. And just a little bit on the numbers, in the group items, there is a 37 million gain, realized gain and that was (indiscernible) that has legacy loss and some positive from the designated trading portfolios, particularly, there is an EFS big move down in the (indiscernible). So, I wonder is it just factor of currency move that we are seeing a positive on the group items, but a negative in the EFS, of course, then on the same asset class, but generally just if it's only a question of FX? Thank you.

George Quinn

So, the second one is FX, so if you look at it overall, it's fairly flat to slightly – very slightly, negative, immaterial in the FX. On the contingent capital side of things, I think the reason why you see us do we are doing currently is that we are trying to take a longer term view. And I think that the estimates that we think we are issuing today I mentioned early, we think it's got a very high equity content. And if I look at the price that we pay for that type of equity achievement versus other forms of equity capital, it feels like a good part of the capital structure to increase for us. So, over time, I expect is to deploy capital or remove it from the system, but for the time being, it's only seems to me at least this is an attractively priced source of capital and this is why we've been using that essentially to refinance the hybrids.

I agree that we have sufficient capital, but this is more of a longer term view. And I think that kind of bringing the average cost down is a good thing to do. If at the end, we cannot use all the capital that, we'll remove the more expensive capital fast and there is capital that we also depend a lot more than the 7% or 8% that we're paying for the two issues that we've done in the Swiss and Asian markets in the first quarter of this

Vinit Malhotra – Goldman Sachs

Alright. Thank you very much.

Operator

The next question is a follow up from Mr. Michael Huttner from JPMorgan. Please go ahead sir.

Michael Huttner – JPMorgan

I have two questions, thank you very much. First one is the 50 the loss in life due to lapses, if it carries on that rate for eight quarters. And my last slide there is a basically if you had different accounting, you could just treat it 1.5 and write off $200 million and have done with it. Is that’s you’ll be accounting only allows to do it also see the expense or is that something would it be bigger number and then we have very simple question. What is happened so far in Q2? And I have zero. I know the tornadoes happened, but I suspect the attachment points and below what you reinsure that maybe something.

George Quinn

So, on the first one – I think, if you see – if you look forward and you sees negative impacts that raises a question about whether you have loss recognition event. The challenge for us Michael is that you do that loss recognition testing on segment level. And you take into account all of the cash flows. So if I look at U.S. life business, we expect the cash flow of those to be significantly positive even with the impact of this pre-2004 effect. So its – but we are not committed under the rules to recognize the negative economic impact of that particular product. We have recognized already EVM, so that impact is recognized there, but it's not in GAAP and where simply believe (indiscernible) through GAAP over the next several quarters.

I will have to be much, much large, I mean orders of magnitude bigger, so, to drive the risk that we really had a loss recognitions event. So, while appreciate it would be tidier to put in behind us, which is what we’ve done in EVM GAAP really doesn’t permit that treatment. On Q2, I’m going to resist the temptation to give a details update on Q2 because obviously where we’re not very far end to it. I think I would say, Michael, is that you mentioned the tornadoes. The -- I think the last year we had see the tornados and probably Joplin last year in the second quarter as that did cause losses for those? I forget the precise figure, but I think we had I think from two season tornados quite close to $100 million for each series of event. So, I wouldn’t expect that tornados had a zero impact on us, but no I would expect it to be particularly material. As you say given the natural retentions that people have on the site but tornado is tend to be fairly concentrated as most of it has to remain with the primaries but I wouldn’t expect its had a zero impact on us. Otherwise, as you point out from a natural catastrophe perspective so far, its been a relatively quite quarter.

Michael Huttner – JPMorgan

Good, thank you very much.

Operator

The next question is from Maciej Wasilewicz of Morgan Stanley. Please go ahead.

Maciej Wasilewicz – Morgan Stanley

Hi, it's Maciej from Morgan Stanley. I want to ask the renewals in April. On specifically I think you said that the ability your ability to achieve that’s enormous price improve you did achieve was partly driven by the effective year able to price private layer. I guess more on if I can get system little bit more color on that and I guess those few things I look. What is the automation of the other site you go to a private lab, for example, I mean is it a relationship thing, is it capacity, is it because they wanted to save money because I think that those the broker pricing is wrong or they want to not pay a broker? What is the motivation I guess is the first question? And secondly what advantage do you have versus other large peers in this business, why didn’t, what’s the competition like in those layers? And is it the highways that you’re weighing? I guess verbally it’s one question just if you give me more color on the private layer business that you wrote in April renewals?

George Quinn

Okay. And so I’d be tempted to say almost all of the above. I think that the – I think the – is not unique for us, I don’t, I’m not trying to give you the impression that this is something only Swiss Re we can do. But I think given the risks here, given the fact that no everyone is prepared to increase capacity for this particular market in the current conditions. And given our capital strength means it’s probably something they were more able to do than others. And given the price rises we’ve seen it, for us it makes absolute sense to do this. But it’s not unique, there are probably a few other players that can do similar things. And I know I have heard from at least one other major reinsurance company that they do this. But the things that drive are the need for the capacity or the support from the client side, the fact that often Swiss Re will invest heavily with the clients and understanding the particular risk. And they would expect to be paid for that. And the question is whether they – the client would like to pay the rest in the market, the same amount at the same time.

So, there are obvious things that they or obvious choices that the client has that typically makes there’s something that we would – that we are quite keen to do. I think if you look over the last few years, I think it flows in general cycles. I think as the market softens slightly, there is less ability to do these things and as the market hardens this probably move on, but certainly we tried to do this wherever possible. I mean, April 1 and some of the benefits of it show up and then renewals.

Maciej Wasilewicz – Morgan Stanley

And just one thing that you touched on, I mean could you broadly generalize and say that this is highlighted stuff or related stuff or is it facultative or is it generally a broad range of different thing – different areas?

George Quinn

Yeah, I couldn’t generalize much I’d be guessing, so don’t know the answer to that question I’m afraid.

Maciej Wasilewicz – Morgan Stanley

Alright, thank you.

Operator

The next question is from Mr. Jean-Francois Tremblay, please go ahead sir, from RBC.

Jean-Francois Tremblay – RBC

Good afternoon. I have a question regarding the expense ratio with the P&C reinsurance business would appear to see reenter this business, there is only two parts of my question, first of all it seems to me that looking back at the historical data you published there is somewhat greater volatility, the expense ratio quarter-to-quarter 2011 than what we seen before that much, but bit more in looking at 2012 versus we try to follow that quarter, should we expect similar variations or if there is something else that could limit that volatility the expense ratio. And then point number two, what we’re thinking in terms of more long-term currently believe that’s the expense ratio is somehow, embellished by the 14% see for quarter share with Berkshire that’s accounted those the reduction and expenses. So looking out to next years when that fee will no longer serve to reduce the expense ratio? Are there any other drivers potentially that should be taking into account that could help and limit the effect on the dividend the expense ratio from the reduction of that benefit?

George Quinn

Yeah, so thanks. So the, yeah on the first one, I think you see it particularly in P&C but I think it impacts the other segments too. I don’t think you see as much going forward so the main driver last year is partly actually the incentive compensation accruals. In the past we’ve had cliff scheme that if you achieved certain targets, this appeared at last year various points in the year you can imagine that was the events of the first quarter it was an expectation we would not achieve the targets so it was accruals on the vast demand by Q3 we had rebuilt the performance and the accruals were reestablished. The scheme that have now been put in place by the Board kind of more longer term and as far less of the cliff feature to them so there is only cut that I discussed with Michael earlier. The kind more smooth progressions. I think last one you see some of the volatility that we saw last year.

On the second point about the, again you’re completely correct on the second issue. We have a benefit on the quarter share from Berkshire Hathaway we have an overrider so the expense is as it appears a bit higher than the expense ratio so that means when its removed you’ll actually see an increase in fact in the acquisition cost line. So we if you look at admin and acquisition together you’ll see it in the acquisition cost line rather than the other expense line. In reality there is no great deal that we can or would actually want to do. I mean the quarter share has been I mean its good for Berkshire Hathaway and I think its good for us it’s certainly benefited us in made us able to do things that would have been hard otherwise but the overall benefit of retaining the still profile business even with the loss of the override outweighs any concern I have about the small – relatively small increase we’re going to see in the expense ratio. If we grew as we expect if the margins continue to improve, I expect to see it recover quite a bit of that.

Jean-Francois Tremblay – RBC

That's very clear, thank you.

Operator

The next question is from Mr. Fabrizio Croce of Kepler. Please go ahead, sir.

Fabrizio Croce – Kepler

Good afternoon. I have only two questions, actually. The first one is about your corporate bonds, for the financial exposure is pretty considerable and particularly U.K. and U.S. bank represents in more than 70% of this exposure. So, I’m wondering if you could give us the five biggest position investments that you have or an alternative even if not preferred, if you could give us the highest exposure and as well, what’s the maximal limit to the single position. The second one is about the renewals. There is plenty of attention about this is a plus 14%, plus 17%. Here, the question is you could give us the split up between how these renewals developed for the tricky portfolio and for the excess of loss portfolio or if you don’t have this figure if you could run us the through the typical waterfall, which we use to show in the renewals and how we go from one period to the other having the amount o consult renewal decreased on renewal, and so on, please?

George Quinn

Thanks, Fabrizio. So, on the first one, for reason that may or not be always, I’m not going to give individual names or individual name limits. The firm has a risk management system that specifies country limits, it specifies individual name limits. I think if you look at the corporate bond portfolio, I think overall we have a particular exposure to the Anglo-Saxon market because it’s driven by the life insurance business that we have so, particularly the Admin Re business in U.K. and in the U.S. and the Life & Health business in the reinsurance side that we have in North America.

I think if you look at the overall weightings I guess in my view we would be may be slightly underweight financials compared to the rest of the mark on that gross basis. And as you know from time-to-time we do hedge parts of the portfolio using single name CDS is although, I’d also point out that our hedging is point in the lowest level it’s been in some considerable time. We actively monitor the names that we have in there. We’re not shy of hedging risks if we perceive one of the names to be the challenge for us. We always have the expertise of the third-party asset managers, we’ve actually managed most of these risks on their behalf and it's an exposure that we are comfortable with. And if I think we would believe that from a corporate bond portfolio all right we discussed great things but we are overall waiting of a corporate trader. Swiss Re's portfolio, credit in Swiss Re's portfolio is typically much less than most of our peers and much less exposed to the Euro zone than most of the peers.

One of the renewal figures we have given today and actually for all of our reinsurance book so, all of our treaty coverages, which of course will include the excess of loss and we don’t give the waterfall we’ve given in the past for the reasons that and I gave in answer to an earlier question that the challenge being that there is no clear definition of what’s canceled or for example if I’ve got a contract with the client and I’ve changed the retention, changed the commission that new contract or is it cancellation or restructuring of existing one. So what we prefer to focus honestly absolute change in price adequacy we think it gives you a better view of the overall beginning to end rather to focus on the price change on the piece that we’ve renewed. So, we don’t provide that waterfall breakout anymore.

Fabrizio Croce – Kepler

And sorry for following up, but using that old definition if you would say we would say we use exactly old definition. Would you be able to provide this wafterfall this year? And the other one is I understand the story we've not giving out the name, but what is, I mean, why you are not saying how big the business or so how sizable the positions is which will have a maximum on a single position? I mean what is the risk of it?

George Quinn

So, on the first one, I think it’s Andy Broadfield asked me the question earlier and I gave some qualitative comments albeit rather than quantitative ones around the price movement that I perceive on the new business versus the renewal part of the portfolio. And I’m not going to go further than the answer I gave Andy earlier. On the credit side – we gave extensive disclosures and the appendix to the investor presentation we’ve given today. And I won’t repeat the comments I gave earlier but the way that we invest but I don’t intend start giving out individual names of individual investments. It’s not done.

Fabrizio Croce – Kepler

Okay. Thank you.

Operator

(Operator Instructions) The next question is a follow-up from Mr. Thomas Seidl of Sanford Bernstein. Please go ahead sir.

Thomas Seidl – Sanford Bernstein

Yeah, hello again just two follow-up questions, one on flat 21 where you provide the nat cat overview. And starting with the contents, what are we seeing here at Investor Day you, I think you restricted yourself to nat cat XL of loss business? Is this now the complete picture on the nat cat or again something focus on the nat cat because of loss business? And other question was I think I heard in your video that the motor reserve increase in Italy is minor I still would be interested to hear what’s that it was the cost as it increase and if that is more likely to come?

George Quinn

Okay. So on the first one Thomas, the figures on 21 are all of nat cat and not just the excess of loss. On the motor change, I don’t have the gross change in motor reserve. It was baked into the figures I gave in response to the other question, about 30 million positive impact from casualty overall, so motor is some piece of that Italian Motor is some piece of that and would I expect to see further changes it is always a risk but as we always do we try and estimate and set the reserves according to our view of best estimates. So that would imply that today we don’t expect further changes but they are always possible.

Thomas Seidl – Sanford Bernstein

So on the nat cat is includes thereof the nat cat (indiscernible) part of larger property or whole account treaties?

George Quinn

Right, this covers all of nat cat.

Thomas Seidl – Sanford Bernstein

Okay, thank you.

Operator

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

Michael Huttner – JPMorgan

Thank you very much. I’m just would you figure if we had the same as last year in Japan how much should it cost now?

George Quinn

Is that the only question Michael?

Michael Huttner – JPMorgan

That is the only question.

George Quinn

I don’t know the answer to that question. That would obviously more expensive than it was a year ago given we’ve taken more rents, but I don’t have a precise for you. I think (indiscernible) rather than I give you complete non-answer the thing that we do, do if we haven’t done it yet but we traditionally do with Q2. Is that we provide the I guess the return period exposures for the various perils in Japan will show up and as part of that so I’ll be in a position to answer your question more appropriate if I get to the Q2 disclosure.

Michael Huttner – JPMorgan

But it doesn’t follow linearly from the 40% figure you have kind of gains?

George Quinn

I will not expect it to follow linearly.

Michael Huttner – JPMorgan

Okay. Brilliant, thank you very much.

Operator

Gentlemen, at this time, there are no more questions registered.

Eric Schuh – Head, Investor Relations

Alright, thanks very much everybody. And if you have further questions, please feel free to give the Investor Relations team a call. I’d like to thank everybody for listening and we’d like to close the call. Have a good weekend.

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