Zurich Financial Services Ltd. (OTC:ZFSVY) Q1 2012 Earnings Call May 10, 2012 ET
Welcome to Zurich Insurance Group’s First Quarter Results presentation. I am pleased to announce that we had an excellent start to 2012. We delivered a very strong increase in first quarter business operating profit and net income attributable to shareholders compared to last year. These strong results reflect an excellent underwriting performance and the lower level of major catastrophe and large losses than in the disastrous struck first quarter of 2011.
Importantly, we have seen improving top line growth in all our core segments, by maintaining our focus on pricing, discipline, and portfolio management. And we continued to make excellent progress in developing our presence in select high potential growth markets. In fact, last month we signed a 10-year exclusive distribution agreement to provide wealth insurance products to HSBC clients in United Arab Emirates, Bahrain and Qatar. In Singapore, we now hold the license to access all of our target segments for Life products.
We have also completed the renaming of our acquisition in Malaysia MAA to the Zurich brand. And in Latin America, we’re already seeing the positive impact of our alliance with Banco Santander. The message is clear, our strategy is working. We remain well capitalized with solvency in our AA target range and we are well positioned to continue delivering sustainable growth and to meet our targets for 2013 and beyond.
So let’s have a look at some of the numbers. We had a strong increase in business operating profit for the first quarter at $1.4 billion, up 61% year-on-year. Net income attributable to the shareholders’ grew 78% to $1.1 billion. In General Insurance our sustained focus on underwriting discipline and expense management has continued to deliver improvements in the underlying underwriting results. The reported combined ratio improved by 8.9 points to 94.6% and the underlying loss ratio improved by 3.2 points to 62.3%, which was reflected in a strong business operating profit.
Global Life continues to make progress towards its strategic objectives, increasing geographic diversification outside Europe organically and through acquisitions, while shifting away from the additional savings business, there was protection and unit-linked business and leveraging our global strengths in corporate, life, and pensions. That is reflected in strong new business value growths in Latin America and even before any addition from Banco Santander as well as fee income growth and an improved risk margin.
However, partly due to continued low interest rates, which impacted the investment margin, business operating profit decreased by $69 million to $293 million. Moving on to Farmers, we had strong growth in our management services company was offset by weather-related losses at Farmers Re. Farmers Management Services benefited from strong growth in the Farmers Exchanges which we manage but do not own, as gross written premiums was 4% and gross earned premium options improved to 7.4%.
At Group level, our business operating profit after-tax return on equity was 13.4%, up from 8.5% in the same period last year and from 10.2% for all of 2011. Shareholders’ equity increased to $31.8 billion even after deduction of the accrual of $2.8 billion for the dividend payment in April 2012. This demonstrates our strong capital position and underlines our ability to maintain an attractive and sustainable dividend. I am very pleased with these results. We’re in a very strong position and we continue to deliver in a challenging environment.
In closing, I would like to thank all our employees because without their hard work and their continued dedication to helping our customers understand and protect themselves from risk, these excellent results would not have been possible. Thank you.
Good morning, ladies and gentlemen. I am very pleased to report our first quarter results with business operating profit up 61% and net income up 78% compared to the first quarter of last year. The operating results reflect our continued focus on delivering our strategic targets. In General Insurance, we continued to improve the underlying loss ratio as well as benefiting from lower major catastrophes and large losses.
In Global Life, we continued to improve the quality of our earnings despite being impacted by persisting low interest rates. And in Farmers Management Services, we continued to grow the fees and related revenue while holding expenses flat. We had also seen improving signs of top line growth in all of our core operations while maintaining our disciplined approach to pricing and underwriting. We are progressing well on integrating the insurance businesses of Santander in Latin America with the business performance in line with our expectations. The first quarter statutory results for Santander showed continued growth in both top line and net income. You will find more details about Santander on slide 15.
Now looking at the business operating profit by segment. General Insurance delivered a very strong quarter increasing BOP by $576 million with the underlying performance of the business continuing to improve and the absence of major catastrophes benefiting the result. In Global Life, the business operating profit declined by $69 million as improvements in the expense and risk margin were offset by the impact of continued lower interest rates on the business results.
Premiums, APE and net inflows of assets under management however all grew in this quarter. Farmers business operating profit declined $8 million impacted by higher weather-related losses in Farmers Re. Farmers Management Services profit however increased as the growth in Farmers Exchanges which we manage but do not own drove increased fee income. Other operating businesses losses increased due mostly to the absence of the last year favorable foreign currency movements, as well as the impact of lower yields on investments and higher financing costs compared to the prior year.
Non-core businesses reported a strong result for the quarter of $81 million. This was driven mainly by the Life Business profit of $96 million included in the other runoff book as we benefited from the reassessments of liabilities on certain policies as well as positive reserve movements from reduced market volatility. The reported business operating profit after-tax return on equity was 13.4% compared to 8.5% in the first quarter of last year.
General Insurance had an excellent underwriting performance. Before we go into the numbers, let me set the seat for General Insurance. First, the first quarter of 2011 was very costly for the insurance industry in terms of catastrophes and weather-related events, while the first quarter of 2012 was lighter in major catastrophe events. Second, General Insurance continues to face a subdued macroeconomic environment that is characterized by low GDP growth or even recession in mature markets in Europe.
In addition, the low yield environment persists particularly in mature markets and thus continues to reduce investment income. On the positive side, we see indications of improvements in the U.S. And third, we continued to successfully execute on our combined ratio improvement target through rate tiering and re-underwriting actions. With that in mind, let’s have a closer look at the numbers.
Gross written premiums increased by 5% in local currency. Our acquisitions in Latin America and Malaysia added about 2 percentage points, while prior year premiums in North America relating to exposure growth in the prior year and reflecting the improving U.S. economy added another percentage point. The remaining 2 percentage points are driven by organic growth this year from rate increases and some exposure growth particularly in certain lines in North America and international markets.
The implementation of our General Insurance strategy is continuing to show results. Our stands on pricing and underwriting discipline is unchanged and we continue to take rates with an average increase of 3.1% in the first quarter of 2012 which is higher than in the prior year. Portfolio management actions to ensure adequate levels of profitability continued to be implemented. These actions continued to improve the underlying loss ratio by 3.2 percentage points contributing about $200 million to the underwriting result. At the same time, investment income decreased by about $50 million due to low yields and capital repatriation to the group.
These two factors combined with the absence of major catastrophe events in this quarter were the major drivers of the strong improvement in the combined ratio to 94.6% and about tripling to $856 million. We continued to push rates, apply rate tiering strategies and reshape our portfolios in a balanced way to drive profitability. General Insurance rates increased on average 3.1% in the first quarter of 2012. We are satisfied with the levels of rate increases achieved in a competitive environment.
Let me remind you here of two important points. First, the average rate increase in the first quarter of 2012 comes on top of similar increases taken over more than three years. We started our lead the market initiative in the fourth quarter of 2008 to compensate for a dramatic fall in yields and began to increase rates. Second, rate increases on renewal business are just one element to defend our margins in addition to rate tiering, portfolio reshaping, and applying the same discipline to pricing new business.
Now let’s look at the rate changes of our individual market facing units in more detail. Global Corporate achieved average rate increases of 4% in the first quarter of 2012 with clearly strong rate increases in North America particularly in energy, property and workers compensation. North America commercial has confirmed its strength of strong rate increases with 4% in the first quarter of 2012.
All major lines of business show rate increases and workers compensation continues to lead with a further accelerated increase of over 10% in the first quarter of 2012 versus 7% for the full-year 2011. In addition, we see a higher rate increases in motor and special lines in the first quarter of 2012 compared to the fourth quarter of last year. Overall, we consider this to be a good result in a highly competitive market.
When comparing NAC’s rate increase with U.S. peers it is important to bear in mind that we have started to increase rates early as early as in the first quarter of 2009. Comparability also between U.S. peers is challenging, but when we look at our business on a similar business we see a high rate increases consistent with our leading peers. Just a reminder, rate increases are just one element to defend margins.
Let’s turn to Europe. With regards to rates, increases in European personal lines have reduced somewhat but still show an average increase of 3%. For more than two years, personal lines rate actions have been taken particularly by the U.K. and Italy. This continues to be the case but has helped by a strong increase in Germany which is fueled by the motor line. The rate increases in the U.K. and Italy personal lines of 14% and 4% respectively continued to be driven by the motor books.
These rate increases continuing to improve the excellent year loss ratio further confirming the trend from 2011 and 2010 and thus continue to demonstrate that our actions taken show through in tangible results. Commercial lines in Europe saw similar rate increases as in 2011. Overall, increases continued to be at a healthy level and help to support the profitability of these portfolios.
Now let’s move onto premiums which are driven not only by rates but also by acquisitions, underwriting and growth actions, retention and new business performance. In global corporate, gross written premiums increased by 4% in local currency helped by improving new business results despite a competitive marketplace. Global Corporate underlying production excluding captive and funding business is strong which is reflected in net earned premiums being up 6% in local currency for the year.
The exposure base has increased in North America offset by a reduction in Europe as a result of challenging economic conditions. We continued our expansion in Asia and the Middle East increasing premiums by 34% in local currency although from a small base. This reflects the Group’s strategy to expand our presence in these markets. North America Commercial has grown top line by 6% in the first quarter. The primary driver was the improving economic conditions in the U.S. which also show through in favorable prior year premiums.
The change in prior year premiums alone added about $60 million or 3 percentage points to the premium growth. The remaining growth was driven by rate increases and continued momentum from strategic growth initiatives. These resulted in targeted growth in the car warranty business, property, and accident and health lines. Overall, NAC’s focus on underwriting discipline and profitability is unchanged.
Europe’s premiums overall, reduced by 2% in local currency in the first quarter of 2012 even though we have achieved rate increases. The economic environment in many European countries to remain challenging. We continue to defend our margins with targeted re-underwriting strategies. As such, targeted actions in our personal lines motor books in Italy and the U.K. explained about two-thirds of the decrease in the quarter. Top line has been further impacted by our comprehensive re-underwriting initiatives in Germany.
Premium reductions in Europe however were more than compensated by increases in international markets. Here premiums grew by 27% in local currency driven by growth in Latin America from the acquisition of the insurance business of Santander as well as underlying growth in motor lines in Brazil and Argentina. The Asia Pacific region also grew 16% in local currency from the acquisition in Malaysia as well as organic growth in Japan and Taiwan.
The two acquisitions contributed about $160 million to the total $280 million premium growth. As you can see in the charts on the left, the underlying loss ratio continued to improve 3.2 percentage points in the first quarter of 2012 to 62.3%. This has driven by improvements in all market facing units as re-underwriting, portfolio reshaping and rate tiering actions continue to show through and rate increases taken in the current and prior period are earning in continuously.
The biggest improvements in the underlying loss ratio stem from Global Corporate where such actions taken in particular in the motor and workers’ compensation lines are showing through. In addition, the first time inclusion of the acquired Santander insurance business also helped to improve the loss ratio by about 0.5 percentage points. Furthermore, North America Commercial benefited from an unusually low level of property losses.
Let’s continue by looking at the components of the underlying loss ratio. In the second column from the left you see the impact of prior year premiums which represents the earned elements of premiums related to increased exposure on prior year policies. These adjustments result from improving economic conditions in the U.S. which showed through in positive prior year premiums versus last year.
The impact of such prior year premiums needs to be backed out so that the underlying loss ratio is not distorted as the corresponding claims are booked as prior year reserve development. I will come to that in a minute. Moving on, prior year reserve releases amounted to a $138 million or 1.9 percentage points of the loss ratio. This is over a $100 million lower than last year.
The single largest driver of this decrease was the fact that the positive prior year premiums which I mentioned before lowered the prior year reserve release by about $40 million. The overall releases of $138 million emerged from various regions in lines of business across our global portfolio. We believe that the overall reserve adequacy is unchanged year-over-year.
Moving on to large losses. Despite the fact that there were no major catastrophes in the first quarter of 2012, there had been some large loss events in Europe from severe winter weather adding about $60 million compared to last year. Nevertheless large losses came in at 7.7 percentage points of the loss ratio or 0.7 percentage points below the first quarter of last year. In summary, the overall reserve adequacy is unchanged. The underlying loss ratio continued to improve by 3.2 percentage points.
We see written rate increases to broadly cover or exceed the current estimate of lost cost inflation while re-underwriting actions and previous rate increases are continuing and are earning into results. Overall, the3 expense ratio increased by 0.5 percentage points to 27.1% which is largely driven by commissions. Commissions as a percentage of debt earned premium are up for two major reasons, the Santander acquisition and lower ceding commission.
When discussing the loss ratio, I mentioned that Santander’s loss ratio was below the average of General Insurance. The flip side to that is that the business also comes with a high commission structure and with that an above average expense ratio. In addition, the commission ratio increased due to a change in reinsurance placements in Global Corporate which resulted in lower ceding commissions. Other underwriting expenses which is the element of the expense ratio that we can influence most actively is slightly down.
We continue to benefit from our expense reductions in mature markets. However, other underwriting expenses were negatively impacted by accounting charges related to IAS 19 pension costs. At the same time, we continued to make further investments in organic growth initiatives particularly in Brazil and the Middle East. Now let’s look briefly at the major drivers of the underwriting and BOP performance by business. As discussed in the previous sections for General Insurance, the underlying loss ratio improved in all market facing units as re-underwriting, portfolio reshaping, and rate tiering actions continued to show through.
Furthermore, the more benign experience of major catastrophes and large losses compared with the first quarter of 2011 was a significant factor. This applies in particular to Global Corporate and international markets and explains a large portion of the improvement in their combined ratios to 89.6% and 98.5% respectively. North America Commercial benefited in addition from positive prior year premiums and an unusually low level of property losses.
While Europe’s underlying loss ratio improved, the region recorded more severe winter weather-related losses and the expense ratio increased reflecting higher IAS 19 pension expenses in the U.K. and Switzerland. While volumes were still reducing from the challenging economic conditions, we continued to implement re-underwriting actions to defend profitability.
Global Life continues to expand its geographic footprint and improve its quality of earnings with a continued focus on unit-linked and protection business. Before starting with the Global Life results, I would like to just highlight three points that impact the numbers. First, we continued to work on consolidating the acquisition of the insurance businesses of Santander in Latin America into the U.K. The IFRS financials include results for the acquisition date up until the end December 2011 only mainly GWP, policy fees and insurance deposits, net inflows to assets under management and business operating profits. New business value numbers will however be included later in the year.
Second, at the beginning of 2011 we implemented a methodology change to recognize the new business value based on the expected lifetime of policies for the corporate risk business. This impact is transitional with the largest positive impact seen in 2011, a lesser impact in 2012 with any noticeable affect expected phase out by the end of this year. Third, economic conditions in Europe continued to be difficult with low interest rates persistent.
Both are negatively impacting new business volumes and margins, having the effect of offsetting the good growth in protection, corporate life, and pensions and geographic exposure to faster growing markets such as Latin America. Moving to the slide itself, GWP, policy fees and insurance deposits increased by $1 billion to $7.4 billion or by 19% in local currency. The majority of the positive $1 billion impact came from Santander with the existing business remaining largely stable. Net inflows to assets under management increased by $1.2 billion to just under $1.5 billion, highlighting the significant growth in corporate pensions business especially in the U.K. with Santander contributing around $400 million.
The new inflows helped to grow assets under management by 13% to $248 billion with Santander contributing $13 billion to this increase. I will talk to the change in new business value, APE, new business margins and BOP on the next two slides. The retail pillars which include Bank Distribution, IFA/Brokers, Agents, International/ Expats collectively declined by $21 million or 15% in local currency. The decline across these retail pillars can mostly be attributed to the steep reduction in interest rates over the past 12 months impacting the margins mainly in Germany within Bank Distribution, IFA/Broker and Agents.
This impact in Germany is a function of the current economic environment and while we continue to diversify the business mix into unit-linked and protection products. Indeed, the APE grew by 11% in local currency in these preferred products in Germany. All North American and Latin American retail pillars experienced APE and new business value growth compared with the first three months of 2011.
In North America strong new business margin growth in protection business came from the mix of price increases and improved utilization of reinsurance. Growth in Latin America new business value particularly in Brazil was driven by growth of over 100% in individual protection business. As a reminder, the new business results for Latin America do not include any contribution from Santander’s acquired businesses which will further strengthen our position in the region.
Volume and margin increases in International/Expats protection business in Asia Pacific and Middle East were more than offset by lower margin and sales of unit linked business. Our disciplined underwriting standards did not allow us to compete on all product offerings leading to a decrease of $5 million in new business value for the International/Expats pillar. Within the Corporate Life and pensions pillar, the reported new business value declined by 11% in local currency. However, this decline is purely a function of the methodology change that I mentioned on the previous slide.
If we strip out this transitional impact, new business value grew by 34% in local currency, driven by global relationships with major employee benefit consultants and reflecting the strength of our global footprint in this pillar. Highlights were strong growth in savings and protection in the U.K., corporate business in Switzerland and corporate protection in Latin America particularly in Brazil.
Private banking client solutions increased new business value by $2 million to $6 million driven by continued placements of tranches of an investment bond through bank partners in the U.K. and sales from the hub in Luxembourg. To provide you with further insights to the Global Life operating profit drivers, we will be reporting profit by source on a quarterly basis going forward.
In the first quarter, Global Life’s BOP declined 18% in local currency to $293 million. The reduction of the headline number was largely driven by a $35 million reduction in the impact of acquisition deferrals following actuarial assumptions changes in Germany and the change in product mix in the U.K. as well as $35 million lower special operating items than in the first quarter of 2011 in the U.K. and Switzerland.
Focusing on the profit drivers and move to what we consider as the core earnings, BOP before deferrals increased by $6 million. This includes a $30 million positive net BOP contribution before minority interests from Santander and other margins. Looking into the profit drivers in more detail. The business in-force expense margin of $366 million increased by $16 million or 7% in local currency as a result of higher fee income generated from higher assets under management and higher policy based fees following the ongoing shift from traditional unit-linked business in Germany.
The risk margin of a $193 million improved $20 million or 13% in local currency growing in line with our focus on writing protection business and helped by favorable claims experienced. The investment margin of a $148 million has decreased $44 million or 22% in local currency mainly as a result of reduced investment yields impacting the traditional savings business particularly in Germany.
The gross new business strain of $375 million was flat in U.S. dollars. You can find more details in the Appendix regarding the Global Life profit by source results by company. We are pleased with the progress of the acquired Santander insurance operations in Latin America. On a statutory basis in the first quarter, we saw an increase in gross written premium and deposits of 10% and an increase in net income after-tax of 5% as well as continued growth in cash generation.
On an IFRS basis, we have put together this slide to provide some clarity around how we intent to treat the intangibles as well as what we have reported in the first quarter of 2012 for business operating profits. On the left hand side of the slide, you can see the high level breakdown of the balance sheet assets at the acquisition date. In our financial statements, the balance sheet has been allocated to the individual line items reflecting the amounts at acquisition date plus the movements from acquisition date to year-end 2011.
The intangible assets net of deferred tax liabilities of $1.6 billion consists of two elements. The distribution agreement and the present value of future profits. The distribution agreements will be amortized on a straight line over the lifetime of the distribution agreements i.e., 25 years. The majority of the present value of future profits will be amortized over five year zone. This however will be more front-end loaded with a high level of amortization in the first couple of years.
On the right hand size of the slide, you can see what we have reported in our results for Global Life and General Insurance together. This is the recognition of profits generated since the acquisition dates to the end of 2011, minus the amortization of the aforementioned intangibles and IFRS adjustments. This means that for Brazil and Argentina, three months worth of profit has been recorded with two months worth of profit recorded for Mexico, Chile, and Uruguay.
Net of amortization and minorities, $24 million has been recorded in business operating profit. This is in line with our expectations. As you would expect with a complex acquisition of this size, we continue to work on embedding the processes required to be able to incorporate the numbers in a timely fashion but for now and at least for the next few quarters we anticipate the time lag in the reporting.
Recent data suggests that the path of economic recovery in the U.S. is more fragile than it appeared at the beginning of the year. Regardless, consumer confidence continued to improve. Thus some recovery of auto and new home sales from their subdued levels is expected for the remainder of the year. Last year, Farmers demonstrated significant progress in the execution of its multi-channel and multi-brand strategy. I am pleased to report that strong organic growth numbers continue to further evidence this in the first quarter.
Let me first touch on business operating profit. While Farmers business operating profit overall slightly declined by $8 million or 2% to $372 million, this is entirely due to Farmers Re. Farmers Management Services business operating profit however increased by $25 million or 8% to $354 million as management fees and relative revenues went up 4% or $28 million to reach $710 million.
Management and other related expenses on the other hand remained virtually unchanged. Farmers Re business operating profit decreased by $33 million or 65% to $18 million. This is due to Farmers Re positing an underwriting loss while having increased the All Lines Quota Share Reinsurance treaty participation rate to 20% from 12% as per the end of December 2011. Catastrophe losses drove 2.1 points of the 3.4 points deterioration of the combined ratio to a 101.5% as well as the fact that we experienced more favorable prior year development last year.
The Farmers Exchanges achieved strong growth in the first quarter with all active lines of business contributing. Overall, gross written premiums went up 4% to $4.7 billion. This compares to 1% for full-year 2011 and 3% for the last quarter of 2011. Growth of policies in-force was 2% in the first quarter of this year. Auto excluding 21st Century Direct grew by 3% or 2% when adjusted for the California Auto Rebate. Homeowners grew by 3% while this business was still shrinking in 2011.
Retention improved in both lines of business. Particularly strong growth was achieved by 21st Century Direct with 6% by specialty with 9% and by business insurance with 6%. 21st Century Direct cross-sell and quotes-not-taken yielded $66 million in premiums, more than double the amount a year before. The first quarter combined ratio slightly deteriorated by 0.2 points to 102%. Catastrophe events overall added 3.4% to the loss ratio compared to 2.4% in the previous period as in March of this year. The Midwest and Texas experienced unusually high hill [ph] and wind losses.
This was offset by an improvement in the expense ratio however. April again was heavy in terms of catastrophe losses. The Farmers Exchanges continued to take appropriate underwriting and rate actions necessary to improve their combined ratio. Finally the surplus ratio was at 38.7% at the end of the first quarter, slightly up from the 38.1% at year-end. As usual, you will find additional details in the appendix.
Investments also delivered a strong result in the first quarter. Financial markets in the first quarter of 2012 were characterized by reduced risk aversion. Credit spreads tightened, equity markets froze and yields particularly on peripheral European government bonds declined. As you would expect, we benefited from this more upbeat market environment and posted a total return on Group investments of 2.1% in the first quarter compared to 0.3% the year before.
Please note that these figures are not annualized. Net return which matters from our profit and loss account was 0.9% virtually unchanged from the year before. Net investment income slightly declined by 4% or 2% in local currencies to $1.7 billion as maturing fixed income securities continued to be reinvested at lower yields. Net capital gains of $50 million were reported in the first quarter. Realized gains on debt and equity securities were partially offset by losses on derivatives positions used for hedging exposures to equity markets. Net unrealized gains increased by $2.4 billion due to the favorable market conditions I referred to above.
Finally, group investments increased 6% or 4% in local currencies to $206 billion reflecting the revaluation of large parts of the fixed income portfolio and the acquisition of Santander’s insurance operations in Latin America. Despite the solid performance, the recent downgrade of the sovereign credit rating of Spain and the continued political risk remind us that financial markets are likely to remain challenging for sometime to come. Our focus on financial discipline, managing our assets relative to liabilities and maintaining a balanced risk profile remains unchanged.
This positions us well to deal with market uncertainties and to preserve the strength of our balance sheet. The balance sheet remains very strong with shareholder equity increasing 1% to $31.8 billion despite the full accrual for the dividend of $2.8 billion. The book value per share has decreased by 4% to 196 Swiss francs compared to year-end remained unchanged when excluding FX movements and increased by 8% before considering the dividend paid in 2012.
Except for the dividend, all other elements worked in favor of an increase in shareholders’ equity, most notably net income and the change in net unrealized gains. Please note that net income attributable to shareholders’ of $1.1 billion was after an effective tax rate of 22.9% and the return on common shareholders’ equity was 14.4% for the first quarter versus 8.3% last year.
Before I talk to this slide, I would like to take this opportunity to outline how we intend to disclose our economic and solvency capital ratios going forward. For the last four quarters, we have focused communication on the SST ratio. This was primarily due to the fact that SST was becoming mandatory and in anticipation of being able to harmonize our internal model with the SST. After reviewing internally, the growing gap between the various models in how risks are assessed, we have concluded that we should continue to run the models separately with the Zurich internal Economic Capital Model or Z-ECM continuing to be used for managing the business.
As this will continue to be our primary decision making tool, we feel that disclosure on this internal ratio should be more relevant to the market. So going forward, we will therefore provide both the final Z-ECM ratio and the SST ratio as filed with FINMA for the full-year at Q1 and half year at the Q3 results. A description of the movements in the ratio will be focused on the Z-ECM model.
We will look to update the market for the current quarters only if we estimate the ratio to have move materially outside of our target range that I will talk to in a moment. In the appendix you will find sensitivities to help with you understanding how the ratio may have moved intra-quarter. Just a reminder however, sensitivities are best estimates and typically non-linear which means they will vary depending on prevailing market conditions at the time.
Now, moving to the slide itself. Our capital solvency position remains strong on all metrics with both economic models in line with our estimates at the full-year. Our final full-year 2011 Z-ECM ratio came in at a 103% which is within our AA target range of 100% to 120%. The SST ratio as filed with FINMA was a 185% after methodology changes. The Z-ECM ratio decreased from a 122% to 103% in the second half of 2011. The main impact to the ratio related to the historically low interest rate environment together with spread widening on both peripheral sovereign exposure as well as on the corporate bond side.
These developments negatively affected the Z-ECM ALM risk position as well as risk exposure to Life liability and Life business risk. They have also contributed to a full and available financial resources. As a reminder here, in one of the key differences between the models, the Z-ECM model uses swap rates for discounting, whereas the SST uses government rates for discounting with neither including liquidity or matching premium and therefore being conservative.
The acquisitions which we have closed in the second half of 2011 are reflected in the Z-ECM results and have also contributed to the lower ratio. As the Z-ECM will continue to be our primary decision making tool, this slide aims to demonstrate how we think about this ratio along with the capital actions at various levels and how these levels relate to the SST ratio. As we have highlighted consistently, we target a AA capitalization level represented here as a 100% on the left hand scale. This has not changed, nor has the range in which we aim for the ratio to fluctuate and this is between a 100% and 120%.
This range is designed to be a volatility buffer, therefore when the ratio is within this range, we continue to monitor but do not look to implement specific actions at the Group risk-based capital level, but will of course look to maintain a balanced risk profile. As you will note on the slide, as the ratio moves above or below the target range, we have specific actions to consider. You will also note that the 100% Z-ECM AA line goes across to the right hand side currently corresponding to roughly 180% under the SST which is calibrated to a lower financial strength level and includes other key differences which are detailed in the appendix.
As mentioned before, this relationship between the models is also likely to move overtime, especially as the SST framework continues to develop and risks are not covered in the same way. Also important to note here so long as the SST ratio is above a 100% as shown on the right hand side of the slide, the regulatory requirement is met. So there is three key points I would like you to take from this slide are; one, the Z-ECM continues to drive our capital and business decision making. Two, we aim for the ratio to fluctuate within the 100% to 120% range of a AA calibrated model. Within this range, there is no action required. And three, the regulatory requirement is met as long as the SST ratio is above 100% however SST is not used as a primary tool for decision making.
In summary, the first quarter results were excellent as we continued to improve our underlying underwriting profitability and benefited from the lower level of major catastrophes and large losses. We are pleased to see top line growth across all business lines while we continue to be focused on our pricing and portfolio discipline as evidenced in General Insurance with strong rate increases holding and the underlying loss ratio further improving.
In Global Life, without product mix focused on unit-linked and protection, contributing over 80% to new business value, and our solid margin in Farmers. We are pleased with a double digit returns on equity. The strength of our balance sheet remains and our solvency ratio is in our AA target range. And we remain focused on executing on our strategy to deliver our target. Thank you for your attention.
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