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Executives

Martin Senn – CEO

Pierre Wauthier – CFO

Debra Broek – Head, IR

Analysts

Andrew Ritchie – Autonomous Research

Spencer Horgan – Deutsche Bank

Andy Broadfield – Barclays Capital

Brian Shea – Bank of America Merrill Lynch

Vinit Malhotra – Goldman Sachs

Michael Klien – Nomura

Jean-Francois Tremblay – Royal Bank of Canada

Maarten Altena – ING Bank

Farooq Hanif – Morgan Stanley

Michael Huttner – JP Morgan

Stefan Schürmann – Banque Vontobel

Atanasio Pantarrotas – Cheuvreux

Ralph Hebgen – KBW

Zurich Financial Services Ltd. (OTC:ZFSVY) Q1 2012 Earnings Call May 10, 2012 7:00 AM ET

Question-and-Answer Session

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to the Results reporting for the three months to March 31, 2012 conference call. I am Gorham, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it’s my pleasure to hand over to Ms. Debra Broek. Please go ahead madam.

Debra Broek

Thank you and good day to everyone on the line. Welcome to Zurich Insurance Group’s Q1 telephone conference. I hope you all had the opportunity to watch the video and also for the first time you were able to probably download it onto your iPad or your iPhone. So hopefully you found that convenient. And I would like to pass it over now to Pierre Wauthier, our CFO.

Pierre Wauthier

Thank you very much Debra, and good afternoon or morning or evening everyone. So just perhaps to put in context a couple of minutes, we have an excellent start in 2012 and we are very pleased with the results for the first three months with a strong business operating profit as well as a strong NIAT. Strong ROE as well of 14.4%. And this reflects the strong underlying performance across our operations particularly in GI with improved underlying loss ratio, but as well seeing growth across all other lines of business. In GI, we have 5% growth on the premium side in local currencies, in Life with 11% or at Farmers with 4% growth.

We also are quite pleased with the fact that we’d be able to maintain the strong balance sheet. We are within as indicated in February, within our target range of AA at 100% to 120% ending the year at 103%. And I think these are all proof points that we remain focused and disciplined about executing our strategy and that we’re making progress along these lines. The other point I think is that we are starting also to see our growth in emerging markets showing through, within particular the results from MAA and Santander now embedded in the numbers, albeit with one quarter lag still in the Santander results, and we will do a catch-up later in the year.

So overall, very pleased with that. And I’m happy now to take on questions.

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question is from Mr. Andrew Ritchie from Autonomous Research. Please go ahead.

Andrew Ritchie – Autonomous Research

Hi, I have a two questions, first of all, can I just understand a bit more about the run rates of Life profitability, I know there was some impact from lower spreads and also some impact from the change of policy on DACH. I just want to understand if there is any other special impact – negative impact in the quarter, or is the run rate we’re seeing kind of to be expected based on current levels of investment return and the current business mix, which I think in particular is affecting with DACH impact in the U.K., so just a bit more color on the Life run rate would be helpful. Second question, could you remind us, I think you’ve told us in the past, what would be economic solvency coverage if you were to include liquidity premium that you include in your Life EV in the economic capital coverage? Thanks.

Pierre Wauthier

Okay. So Andrew, with regards to the run rate Life profitability, the last year first quarter was impacted positively by special operating items which did not repeat this year. So that had favorable impact on this year. With regards to our profitability this quarter, I think what has been essentially affecting is the low interest rate environment particularly in Germany as well as in Switzerland which has indeed reduced the investment margins. We are seeing growth on the risk margin and on the expense margin in both areas which as you know are our two key areas.

And then the other point is that we have Santander coming in and which is not a full quarter impact. And therefore all of these would indicate that there would be a growth area. I think with regards to the low interest rate environment which has been the key driver, it really depends on where interest rates evolve in order to improve that but at the same time what you can expect is that the stronger growth that we’re seeing in emerging markets should help the business operating profit going forward.

Andrew Ritchie – Autonomous Research

So on the U.K., wasn’t really affected by investment margin, its more change of policy on deferred acquisition costs. Is there any lumpiness in there, or I mean essentially the breakdown on profits shows that there is no net impact of deferral going forward, or in fact you must be deferring a lot less in terms of costs?

Pierre Wauthier

This is really mostly due to a change in the business mix in the U.K. And the fact that as a result of this business mix change, the impact on the acquisition of deferral is not the same and has therefore caused, if you want the lesser positive impact in 2012 versus 2011. So that can evolve again as the business mix changes.

Andrew Ritchie – Autonomous Research

Okay.

Pierre Wauthier

Sorry, the second question was on the economic solvency. So you’re absolutely right, our economic solvency ratio is with no liquidity premium, no matching premium or matching adjustments. I am not sure that we have – okay, we have, yes. So I guess in essence this would be around five points on the economic ratio of uplift if we applied just that. The other thing perhaps since you are on Solvency II topic is that we also look to the actual loss liquid point on the yield curve when we do swaps. So it goes very long and this would also make a significant difference if we took the much shorter yield curve that is currently being discussed on the Solvency II perspective, probably same order of magnitude.

Andrew Ritchie – Autonomous Research

Of uplift, 8 points of uplift.

Pierre Wauthier

Of uplift, yes. Because I think the forward point is 4.3% or 4.2%, I think which is quite positive and it goes quite quickly there.

Andrew Ritchie – Autonomous Research

Okay, great. Thank you.

Operator

The next question is from Mr. Spencer Horgan from Deutsche Bank. Please go ahead.

Spencer Horgan – Deutsche Bank

Thank you very much, good afternoon. Just two things please, returning first to the Life business operating profit number and you’ve clearly selective that your reduction in the investment margin is a big driver, we can see that on the slide 14. I was kind of wondering prospectively, is there any scope to mitigate that by lowering the amounts you’re crediting to policy holders, I guess particularly in Germany but also elsewhere. And then the second question was SST has now obviously resolved this issue with FINMA, in terms of the calculation of the Swiss Solvency Tests and the adjustment to the model has been required there, but I am wondering now you have results. Could you a bit clear as to exactly what it’s related to? Thank you very much.

Pierre Wauthier

So I’ll start with the SST question, so the Life adjustments. Sorry, the adjustments to the SST model, don’t want to go too much into the details, but it will essentially about putting additional buffer at the request of FINMA on the different way we look at our ALM risk. And there was also an adjustment as to how we look at the volatility or margins on some of our equities. There is also an adjustment moving from post-tax to pre-tax that we incorporated into the model.

And then the question on Life BOP was….

Spencer Horgan – Deutsche Bank

Basically asking the question obviously we can see the impact of the investment income decline on the investment margin, and I guess I was just asking prospectively is there any potential to mitigate that affect through lower crediting rates to policy holders?

Pierre Wauthier

Well that is something that we always look at carefully, as you know this, a portion of the book in Germany, where we give a crediting rate for the year. So this one is locked in and then next year we’ll have the opportunity to review that rate. And we always review it relative to the market and where the market is, and where we are relative to that.

What we are clearly seeing in trends is that the portion of that product reduces a lot. So just a reminder, the new business that we’ve been selling over 80% is on the expense and risk margin only. So all the times reducing the exposure to the net investment margin and then to the extent we can, then the crediting rates. Sorry and the investment margin would be our other lever as I indicated in some products in Germany for example, this would be something in 2013 rather than 2012.

Spencer Horgan – Deutsche Bank

Okay, thank you very much.

Operator

The next question is from Mr. Andy Broadfield from Barclays Capital. Please go ahead.

Andy Broadfield – Barclays Capital

I have two simple quick questions I think, one, on the other operating business unit, that seemed a little high than I’ve been anticipating, I just wonder whether you might just give me a quick, better feel for what that run rate should be if profitable, and then just talk through that. The other thing just on the reserve releases, I know they were look down a little on the run rate, I am sure there is nothing and this might be normal fluctuations but adding back the prior year premium claims associated for the prior year premium adjustment, it looks a little low versus history, I just wanted to check basically there is nothing in addition that we should be thinking about?

Pierre Wauthier

No. So I’ll answer the first question and then I’ll come back to the reserve releases. So OOB, indeed it is higher. There has been perhaps some slight negative impact, but essentially the quarter last year benefited from the favorable FX impact which did not repeat this year. And the other is that we have slightly increased our amount of debt, partly to finance the acquisition of Santander. If you remember there was the vast majority which was financed in cash but there is also a small portion which was financed by debt. So these are the two key impacts that have affected the other operating business.

Andy Broadfield – Barclays Capital

So they should be sustained effectively, we should think about those as being more normal this year?

Pierre Wauthier

Directionally yes. We are always working on improving it. The other thing however is that we also debt maturing and as the interest rates environment is lower than it was in the past, there is some potential to recoup some of that as time goes by. Reserve releases, I would not necessarily look at one particular quarter to try to guess what the trend would be with prior year releases. You’re right, however that even off they are adjusted for the prior year premium impact on the PYD. The PYD is lower than last year.

I think the way they can develop really depends a lot on the, what claims inflation trends we see. We have certain assumptions about our claims inflation. If the trends remain very subdued as they have been and could continue, then you would expect further reserve releases as you start to have some claims inflation, then of course you will have a reduction in the reserve releases, but that really is speculating about the future.

Andy Broadfield – Barclays Capital

So no change, nothing to report effectively?

Pierre Wauthier

No.

Andy Broadfield – Barclays Capital

Thanks very much.

Operator

The next question is from Mr. Brian Shea from Bank of America Merrill Lynch. Please go ahead.

Brian Shea – Bank of America Merrill Lynch

Good afternoon, I am afraid I have to come back to the investment margin in Life Insurance. And maybe I could just try to come with it two ways. First of all just conceptually given how long duration your Life balance sheet is and particularly determine spread balance sheet. I would have thought that the investment margin would respond only very slowly to interest rates. It’s still a bit surprising that it’s coming down so quickly, because as you said lower interest rates, that’s the first way of getting at. And the other way of getting at it, if you look at the gross investment income, the gross investment yield that you’re booking in the Life segment, that’s held up very stably and I would have thought that the margin for shareholders would be connected and had the same trend as that gross investment income, so really two ways of getting at the same question please.

Pierre Wauthier

Okay. So there is a few things perhaps to mention. One is specifically with regards to Germany one of the impacts has been some upward trend in lapses. The other point to make is that you’re looking I believe at the overall global Life investment income. So that doesn’t necessary your point to Germany. I do not have the numbers in front of me, but if you want you can have lower yields right in the basically mature markets particularly actually in Germany because yields have been lower whereas in emerging markets where we’ve got more of the growth.

And remember also that our assets under management did also grow. You’ve had higher yield. So while your net investment income in total dollars maybe constant what it – you would typically expect that actually the yield in Germany would be lower and the yields overall would be lower since your assets that grow. So in summary, you’ve got the yield impact as well as then these lapses which have had an impact on Germany.

Brian Shea – Bank of America Merrill Lynch

To make sure I understand the lapse-to-lapse point, I guess that means that just your in-force book is just accelerating more quickly than one would normally expect towards lower interest rates, is that the point?

Pierre Wauthier

Yes.

Brian Shea – Bank of America Merrill Lynch

Okay, all right. Thank you.

Operator

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

Vinit Malhotra – Goldman Sachs

Hi good afternoon. Just two questions I wanted to ask, one question on the internal solvency model. My understanding was that once the FINMA adjustments are made that famous 1.8 times ratio would change because FINMA was going to make it more conservative. It looks like it hasn’t really changed, basically just talk a bit about the 103% in relation to SST. And the second question is when you underlined in slide 9, the very nice 3.2% we see. You did mention that Santander is 0.5% on that improvement and there is also some good luck factor from low attritional slightly in NAC. So just the pricing, is that still revolving around 2% or what is the sort of underlying the lines combined ratio improvement on slide nine please, the 3.2%? Thank you.

Pierre Wauthier

So what I’ll gather is – I’m sorry the quality of the line was not very good. So repeat the questions and then if I didn’t answer your questions you can go back. On the conversion ratio of 180%, we actually debated that currently whether we should adjust that. Look, at the end of the day it should be really seen as a rough correspondence. The reason is that the SST ratio has different risk dynamics than the Z-ECM. This is summarized in the pack on slide 30. So on top of the calibration not being the same, we do swap rate versus government rates. The operation risk is included in one, it’s not included in the other.

The treatment of senior debt is also different. So you got a lots of factors which actually will have different dynamics on that conversion ratio. So that will really move around then, we felt that it hasn’t changed that much that we should change that conversion ratio which broadly speaking remains reliable. If anything you could say that indeed it should be perhaps a little bit lower than the 180% but not materially different. You also saw anywhere that the adjustment that we made to the SST model as per FINMA’s request was not that significant.

The second question I understood was about the Santander and what was the underlying loss rate. You’re referring to I believe is a fact that in the 62.3% underlying loss ratio there is a benefit from the loss ratio provided by the Santander business. And that is absolutely true. But this is sustainable. Because predictability of the Santander book is pretty good and there is low volatility with regards to the loss ratio such that it should be sustainable. Equally the impact on the commission ratio is also going to be sustainable i.e., the commission ratio on the Santander business is also higher than our average book.

Vinit Malhotra – Goldman Sachs

All right, I was basically trying to understand on the underlying 3.2%. How much of that is coming from just pricing or other than good luck factors like attritional loss ratios coming low for NAC. Is there anything more there?

Pierre Wauthier

All right. So further two comments then. On NAC, there has been indeed a favorable impact from low property losses. So if you take outside of large claims impacts, the property losses in NAC has been low. So they have indeed constituted in the property line from a credit [ph] line ratio. But really a lot it is due to the rate increases and the continuation of the re-underwriting of the books. So what Mario explained back in December of last year about the underwriting is continuing and we’ve seen a lot of improvement in the underlying cost ratio being a result of this more targeted actions, and re-underwriting of the portfolio together with targeted rate increases.

Vinit Malhotra – Goldman Sachs

All right, thank you very much.

Pierre Wauthier

So some of this vast majority is through underlying.

Vinit Malhotra – Goldman Sachs

Sure, thanks.

Operator

The next question is from Mr. Michael Klien from Nomura. Please go ahead.

Michael Klien – Nomura

Yes, so I had two questions. Firstly, you mentioned that the economic activity in the U.S. has helped drive growth by one percentage point in GI. Now my understanding is that there is a time length between changes in economic activity and when this impacts premiums. So looking specifically at NAC, should we expect further positive impact in the coming quarters from the positive development in economic activity that we have seen so far. And my second question is also on NAC. Now you have been pushing for rate increases for sometime and NAC made efforts to improve profitability as you mentioned, you have been re-underwriting selective pruning, then obviously all the focus on efficiency improvements that you have had for the last couple of years. All these look at NAC at the last two quarters have seen a positive impact on top line. However, if I look at expense ratio in NAC, I am not seeing much of an improvement. It was 30.2% in Q1 of last year. It’s 29.9% this quarter. So my question is, should we expect this ratio to improve as premiums are increasing because of the mentioned efficiency improvements that they are writing or are there some other factors that we should consider for example, changed business mix or something else?

Pierre Wauthier

Okay. So I may not be able to answer all of your questions. The change in economic activity, but I hope I can give you at least some indications and then you can refer to IR for further details. The change in economic activity, what really happened last year in particularly in the workers’ comp book is that there was more activity, more people employed.

There were some retroactive premiums paid and received this year. So this is a pretty usual if you want phenomenon. The fact that economy picked up in 2011 has benefited and increased the premiums and added 3 percentage points to NAC’s premium growth. To the extent that the economy continues to grow, then it is not unreasonable to expect that we will see this phenomenon continuing as the people renew and they do the audit premiums for that line of business.

Also there has been some benefits from increased property activity under I guess it’s a bit less clear to what happened. It definitely has helped Farmers by the way, who also has reported some increase in their premiums in the homeowners book. On the expense ratio, well as per your own numbers there was a still a slight improvement in the expense ratio. What I do not know is whether there is this mixed change perhaps between the commission and the other underwriting expenses. What I can tell you however is that the drive to continue on the efficiency program continues across all mature markets and that continues to be true with NAC, where we’ve seen a continued reduction in the direct expenses and FTEs.

Michael Klien – Nomura

So am I right in the assumption then if you go to see further economic activity impacting premiums positively, that we should expect an improvement in the expense ratio?

Pierre Wauthier

To the extent that we strive to continue to be more efficient and this would not necessarily require us to change our operations, I guess yes, marginally speaking we should. But I think the key driver though is that continuation of our efficiency program is really what’s going to drive that. I mean we’re halfway through. We have targets for 2013 and there are still some benefits that we expect to come through both this year and next year. These are more important drivers and the ratio in the slight increase in premiums and how this could benefit the expense ratio. So it’s really the drive to control our expenses.

And it relates well to the strategy which is in the reduction of the combined ratio that we expect to gain on the expense ratio value point and that continues to be our target.

Michael Klien – Nomura

Okay, thank you.

Operator

The next question is from Mr. Jean-Francois Tremblay from RBC. Please go ahead.

Jean-Francois Tremblay – Royal Bank of Canada

Good afternoon. I have two questions on the General Insurance please. First of all, regarding to Global Corporate segment in your prepared remarks on the video clear, you alluded to solid exposure growth in North America but unfortunately it was offset by the weakness in Europe. As you look out to 2012, how do you see those dynamics playing out? Can you remind us that premium may come first of all? Do you think we’re going to see further benefits from your pickup in the U.S. economy, but then what industries is this premium volume in Europe sensitive to do you think that again there will be offset further in Europe by the weakness we’re seeing here? And then the second question is regarding the claims environment. So clearly it seems that claims environment remains favorable now when we’re looking at especially in Europe with the economy further slowing down. At what stage do you think there is a risk that the slowing economy could result and they are not taking claims?

Pierre Wauthier

Okay. So with regard to Global Corporate, yes we’ve seen a growth in North America and that is of course linked to the economy. With regards to Global Corporate in Europe, we have a broad portfolio of activity. We saw some decline. But we’re essentially flat for Global Corporate in Europe. These are dependent on the economic activities. I think Europe we would expect eventually the growth to be a little more challenged than the U.S. It does seem to have stronger growth prospect but not huge upsurge.

Global Corporate tends to be less affected than activity in local countries. So for example we did see our premiums in Spain drop that is clearly linked to the economy. Global corporations across Europe are doing fairly well and therefore the dynamics there may be different and not necessarily affecting as the same way as it affects the local economies.

With regards to the claims environment, we’re still seeing some good results across Europe. Yes, we’ve had a small pickup in the combined ratio but I think as you saw on slide 11 of our presentation, we’re still at 94.9%, which s still a very solid ratio. We are seeing that the right – that the claims environment continues to be relatively subdued. You have two impacts, one, you have countries which are recession or challenged in the economic environment. One is that yes in certain lines of business you may see an uptick in claims but there is also reduced activity which can also have a favorable impact on the frequency.

So you really need to go into the dynamics of each country where you have some trend increases in some but where they remain subdued in others.

Jean-Francois Tremblay – Royal Bank of Canada

Okay, thank you. It’s very helpful.

Operator

The next question is from Mr. Maarten Altena from ING Bank. Please go ahead.

Maarten Altena – ING Bank

Yes, good afternoon gentlemen. Two questions from my side. The first is on the Banco Insurance, regarding the agreements with HSBC. What are your expectations from the HSBC agreement in terms of premium volume impacts on profits and as of when it will kick in? And the second one is on the investment portfolio because I noticed that the percentage of BBB-rated government bonds increased from 1% at the end of 2011 to 12% at the end of the first quarter of 2012. Was this caused by negative rating migration or due to modestly re-underwriting most of the investment portfolio and maybe you would also be able to mention whether there is noticeable impact from the required capital on there that you had Zurich ECM ratio? Thanks.

Pierre Wauthier

Okay. So on HSBC Middle East, we do not give perspective indications of what the premium expectations are. And frankly it’s too early but this is signed so this will be starting this year and we’ll be starting writing business in these countries this year. With regards to our investment strategy, we haven’t fundamentally changed our strategy. Therefore the migration on government bond is essentially due to migration of the credit ratings themselves. So there is no proactive part. We’ve continued to strive to keep a balanced risk profile across risk types and if anything is in our strategy on the ALM side, it has been to actively managing the portfolio in order to maintain a strong credit policy and high quality of the portfolio itself.

Maarten Altena – ING Bank

And any noteworthy impact from the required capital due to the lower credit rating of the portfolio?

Pierre Wauthier

Yes, if you look simply at the government bonds, the impact is minimal because it is overall a very high quality and the migration is marginal. Overall the credit risk increase in their portfolio as part of the market ALM, yes it is slightly but the biggest driver has really been the interest rate risk.

Maarten Altena – ING Bank

Perfect, thank you.

Operator

The next question is from Mr. Farooq Hanif from Morgan Stanley. Please go ahead sir.

Farooq Hanif – Morgan Stanley

Hi there, thanks for taking my questions. First question is just to go back on the investment margin in the Life business. Can you give us a sense of how much stock might decline further, the kind of rate of decline that we might see, can you take any mitigating action? Second question is I didn’t manage to see the whole presentation that you’ve recorded online but just what action have you taken to mitigate against lower yields year-to-date on your economic solvency and SST in terms of hedging program? So could you provide some information on that? And I guess the last question is just going back to slide 15 with the Santander reconciliation, I realized its partial reporting but it seems to me that the uplift that you might have from full reporting might not be that big given that you already have three months to Brazil and Argentina. Could you give us some sort of guidance on that? Thank you.

Pierre Wauthier

Okay. So, on the investment margin and the Life Business, what actions we’re taking? You have to keep in mind that this is on the in-force books, so the in-force books already written, it’s got the guarantees. The way we can manage it is to take potential actions in terms of reducing that risk. The thing perhaps to keep in mind, we indicated earlier that we had taken some interest rate options and swaptions in particular to protect this book against the downside risk. These have essentially remained in place in order to continue to protect it but there is still some downward sensitivity as a result have fallen even further.

We are looking overall at what actions we might take with regards to the investment portfolio really on the dynamic basis. So we constantly look at whether we have the right risk profile, for example, with the ALM risk, how that relates to the overall risk and within the ALM risk what is the split between credit, equity, interest rates, and yield curve shape. The general direction is not to increase it. I think as far as I can go and looking at given the current environment how we can further improve the rates returned by shifting between asset categories.

If I move then to your question on Santander on slide 15, where we indicate, I think this is what you’re referring to that $24 million BOP for the last three months. There is two things that I think you should keep in mind, one, it’s not a full quarter. So you have Brazil, Chile – Brazil and Argentina are full months, whereas Chile and Mexico and Uruguay are only two months. The other thing is when you look at the amortization of intangibles this is a fixed number that is actually going down.

So and in particular the present value of future profits is very front-loaded especially in the first couple of years. So as overtime, what you will see is a declining impact of these intangibles and also as the profit grows you will have if you want to double effect that will accelerate the growth and the profits.

Farooq Hanif – Morgan Stanley

Okay, thank you. I might come back on the Santander with IR just to understand that but just going back on the investment margin, I guess asking it different way in the actual profit by source, could we expect further declines at a significant rate in the next few quarters given where the yield curve is going or do you think actually it’s kind of a more of a one-time effect because of the one-off things that happened in Germany?

Pierre Wauthier

I think the current profit reflects essentially the current market conditions.

Farooq Hanif – Morgan Stanley

Okay, thank you very much.

Operator

The next question is from Mr. Michael Huttner from JP Morgan. Please go ahead sir.

Michael Huttner – JP Morgan

One thing I would say which is I am really enlightened with the presentation. I know it’s a little over time, but I do like your little illustrations, so thank you for that. And a couple of questions, one is the impact of the Santander, it really feels low to me and I look back very briefly on the slide you showed when you first said that you would said $328 million net profit in 2010. We’ve had growth since then, I reported – I know you report if not all the quarters but not all the amounts for all the countries but a $100 million on a statutory basis where pre-tax where in 2010, the full-year pre-tax was $440 million, it was low and I am just wondering whether you can give some color, maybe growth is less strong or claims are high. I don’t know there is something, I don’t know, I may be wrong. And then the second is on the combined ratio in Europe. There are two things, one, Germany, it seems odd that the jump in the combined ratio to 99% in Q1. I am not aware of anything in Germany, but maybe there is something large here which would obviously (inaudible). And then the second is also you would have expected a bigger improvement in Italy. I thought there was a form of a thing about whiplash claims, which meant that whiplash claims could potentially halve and there is an improvement, it’s very mild 98%. This is small things but I would much appreciate of any insight.

Pierre Wauthier

Okay. On Santander, look, I think there is two things that you need to take into account. One it’s only one quarter and not necessarily a full-year. And then second the $100 million is not a full quarter. So you would need to adjust that quarter to a full quarter for all the businesses and I think if you do that, then you would find that the profits annualized would be more or less in line than with the annual profits of last year.

I think the indication we also gave is that on the statutory basis the premiums grew by 10% in the first quarter and the statutory net income by 5%. So there is a growth and that we expect will obviously evolve depending on the quarters and that this one should not necessarily be seen as an indication of accelerating or slowing growth in either direction.

With regards to Germany, you’re right the combined ratio is 99%. It is not entirely where we wanted to be, but I would like to remind you that if you look at the Q3 or Q4 results, the combined ratio here is actually significantly better. So we’re actually on track and fixing the issues that we’ve had. You may recall that the architects and the medical liability line and 99% reflects both the recognition of the issues that we had, as well as the re-underwriting actions starting to take to show through in a ratio that is at least below 100% but where we will recognition we have more work to do and we’re working actively on that.

With regards to Italy, we’re continuing to here re-underwrite and improve the portfolio. And actually the combined ratio has improved to 98.6%. Now to what extend do you take whiplash benefits? I don’t know specifically with regards to Italy. What I can tell you however is that we did recognize whiplash benefits on our Swiss portfolio where we recorded a combined ratio, not loss ratio but combined ratio of 79% and that is indeed due to the fact that the whiplash claims have been significantly reduced and it took us sometime before we recognized it because we wanted to make sure that there were no other developments or other trends in the course emerging before we recognized these reserve releases.

Michael Huttner – JP Morgan

Thank you very much.

Pierre Wauthier

Welcome.

Operator

The next question is from Mr. Stefan Schürmann from Banque Vontobel. Please go ahead sir.

Stefan Schürmann – Banque Vontobel

Yes, I have two questions. The first one is quite short on the non-core units, I am not quite sure anymore around the details of the runoffs you showed, I think there was a dynamic hedge. And could you give us a figure on that in the other runoff units? And the second one on Swiss Solvency Test, coming back to that when I compare sensitivities you gave us at full-year. Now it appears that your sensitivity to interest rates are higher, and I mean that wouldn’t basically back – you’re saying that you added additional buffers on the ALM risk side. Could you just maybe explain a bit more what’s really happened here in the model refinement?

Pierre Wauthier

So two things. One is just on the non-core units, just a remainder, and give you some color about the results. So the first is center, the results have been relatively stable. It can be volatile at times, this is essentially – the biggest part is the visibility book. There is a result have been slightly positive at $12 million, all other things being equaled, we’d expect it to be currently positive. Banking activities is minus $22 million. This is essentially driven by the loan provisions that we took and recognized as a result of the deteriorating environment in Ireland.

Other centrally managed business is around zero, so we’ll skip it and the other line runoff is we lead the Life products of the runoff. And what this recognizes is that reassessment of certain liabilities and also some contracts which were expiring which allowed us to release some reserves in that section. And they are related to the ZALICO part of the business, our U.S. Life subsidiary.

Stefan Schürmann – Banque Vontobel

Okay and you would give us figure on that.

Pierre Wauthier

Most of the 96% is related to that. It’s actually $50 million.

Stefan Schürmann – Banque Vontobel

Yes, okay.

Operator

The next question is from Mr. Atanasio Pantarrotas from Cheuvreux. Please go ahead.

Atanasio Pantarrotas – Cheuvreux

Yes, good afternoon I have just one question left. And with regards to the solvency capital, both in your internal model and Swiss Solvency Test. If I look at the slide number 28, I saw the sensitivity to credit spread, which points that a 100 basis point increase in credit spreads has an impact of 17 points on your internal economic solvency ratio. Two questions, first of all, you mentioned that these also increased in credit spread of the government bonds and I wondered if you mean all the government bonds including for example German, U.S. or only peripheral government bonds. And second question is more general one. If I look at your internal model, you don’t use any liquidity premium, this could penalize your solvency capital and your shareholders at last because I mean, all else equal if your peers use the liquidity premium and in 2011, the use of liquidity premium had been a big impact, a large impact on some solvency margin, internal solvency margin of peers which even was around 40% 50%. If you don’t use these, this could penalize your calculation and your shareholders. So I wondered if this could change in the future, not only for you but also for the Swiss Solvency Test because if the Solvency II model would go in a direction to introduce the Counter-Cyclical Premium, this could create a big difference between the European Union solvency model and the Swiss Solvency Test. So I wonder if you can give some more color on this topic. Thank you.

Pierre Wauthier

Okay. I think it’s really important to distinguish between the internal model and the SST model, that’s really important. As far as the internal model is concerned, we do as we feel best. We’ve calibrated to a AA level. If our ratio falls below 100%, nothing happens. It’s only an indication as to where we go out with regards to our target and what actions we would like to take. And this is something that we can sight in the context of what the environment will be at that time.

The only really binding one is the SST ratio. Now the SST ratio there is not that much we can do about it. It will be whatever FINMA decides. So from that perspective our ratio is at a 185%. You need to be at 100%. So we’ve got 85 points to go or we need to worry about anything. And I am sure indeed that between the SST and the Solvency II, it will be ongoing dialog and that FINMA will have to look at what is happening on Solvency II and they may not consider what kind of adjustments they will make.

And this is actually – one of driving forces as to why we said we really need to look at and manage our capital base on our internal model, because if we try to manage it to the SST, the ratio to the SST taking into account what might or might not happen to Solvency II and how these two models might align or never align further diverse. It really becomes a complex story. So look, we try to be market consistent so that have I think on our mind that they are understanding of what’s going on and therefore that liquidity becomes a judgment issue as what you think it may or may not be or the matching adjustments, that really gives us a very strong and objective basis to make our decisions.

But if we’re on the 100% we’re outside of our target range, again there is no action to this, but I think it gives us really a sound foundation to look at our capital, as opposed to the regulatory capital which are influenced by many elements that such as political, the economic environment and the time et cetera, et cetera. So I’ve answered your question.

Atanasio Pantarrotas – Cheuvreux

Yes, just an update regarding the credit spreads that you referred also to all the government bonds or only to peripheral government bonds, it’s on slide number 28.

Pierre Wauthier

Yes, it’s across everything.

Atanasio Pantarrotas – Cheuvreux

Everything, okay, thank you.

Debra Broek

Okay. And we’ll take on one more question then.

Operator

The next question is from Mr. Ralph Hebgen from KBW. Please go ahead.

Ralph Hebgen – KBW

Hi, it’s Ralph Hebgen from KBW. Just two things one is relating to solvency ratios, I mean I may just have missed it in the presentation, but would you be able to give us an indication of where these are now at the current date, preferably your internal solvency ratios, Solvency I and I am not going to ask about SST because you won’t have it. And the second question relates, I’m afraid the gains of the investment margin, but here just to pick you up on one dynamic which you identified which is the surrender trends in Germany. Would you be able to give us little bit more background on that, what surrenders have done over let’s say in the last four quarters or so, and precisely also what you think is dividing the surrenders in Germany and commensurately where the surrender trends might be going, let’s say in the near-term over the next year? Thank you very much.

Pierre Wauthier

Okay, I think you are Ralph. I do not have the detail on the surrender trends in Germany. So, on this line I had to refer you to IR to provide you some further details. Still a nice opportunity to just highlight one of the things that we’ve been doing in Spain. So if you looked at our APE and new business value in Spain you will have not noticed a drop in the APE. However, we’ve maintained our new business value. I just want to highlight it because we’ve have to face very challenging constitutions in Spain and I think this is a great example of how we’ve really adjusted significantly the product mix in order to maintain the new business value. And this is generally the way we approach these markets and how we can respond towards in creative ways.

With regards to the Z-ECM ratio now, we did indicate that we will provide these ratio on every half year, i.e., at Q1 and Q3. And that as long as that it is in the target range, we will not provide some interim ratios. We do not do a full run between quarters. These are only estimates and as with all estimates are subject to uncertainly which is why – so I guess we’re in the target range, then you can feel comfortable and so are we. And that you don’t necessarily have tremendous further insight that would give you a further estimate.

Ralph Hebgen – KBW

Okay, thank you.

Operator

Ladies and gentlemen, that was the last question for today. I would now like to turn the conference back over to Ms. Broek. Please go ahead.

Debra Broek

Okay, thank you very much again for joining. And we would like to wish you all a good day and a good day in the markets. I’ll take that from margin. Have a good day in the markets. Thank you.

Pierre Wauthier

Thank you very much.

Operator

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

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