Swiss Reinsurance's CEO Hosts Investors and Media Meeting Conference (Transcript)

Sep.10.12 | About: Swiss Reinsuranc (SWCEY)

Swiss Reinsurance Adr (OTC:SWCEY) Investors and Media Meeting Conference Call September 10, 2012 8:00 AM ET

Executives

Rolf Tanner - Media Relations

Michel Liès - CEO

Christian Mumenthaler - CEO Reinsurance

Matt Weber - Chief Underwriting Officer

Analysts

Fabrizio Croce - Kepler

Christian Muschick - Silvia Quandt Research

Fiona Robertson - The Insurance Insider

Operator

Ladies and gentlemen, good morning and good afternoon. Welcome to the Swiss Re’s Investor and Media Meeting at Monte Carlo 2012. I am Sherry, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation there will be a Q&A session. (Operator Instructions)

At this time, it's my pleasure to hand over to Mr. Rolf Tanner and he will now be joined directly into the conference room. Thank you.

Rolf Tanner

Ladies and gentlemen in the room and over the phone welcome to Swiss Re’s Investors and Media Conference here in Monte Carlo at the Fairmont Hotel. My name is Rolf Tanner; I am Head of Media Relations and with me here today are Michel Liès, Swiss Re Group CEO; Christian Mumenthaler, CEO Reinsurance and Matt Weber Swiss Re Group Chief Underwriting Officer.

The agenda today is that Michel Liès will open with an introduction highlighting Swiss Re’s strategy. Christian Mumenthaler will then follow with the three year perspective on the forces that are driving the market. Matt Weber will subsequently explain Swiss Re’s underwriting approach and give an outlook for the P&C market. Michel will then wrap up and ask for the first question. In the first part of the part of the Q&A we will take questions from the room before we go to questions over the phone. To conclude, we will get back to the room. Please limit yourselves to two questions.

And with that I would like to hand over to Michel.

Michel Liès

Thank you Rolf. Welcome to the 56th rendezvous at Monte Carlo. I have attended quite a lot of these rendezvous in the last 10 to 15 years and it’s the first time I attend this rendezvous as a Group CEO. To be open, I really saw such a challenging environment as the one that we are facing now in the insurance industry. Basically, the insurance industry finds itself in the midst of a storm.

For those listening on the phone I am now on slide four. Our industry is facing a particularly turbulent economic and financial market environment. There is Euro debt crisis and implication of a potential breakup. There are recessionary forces in Europe. It's a shallow recovery of the economy in the U.S. and we also see slowing growth in China. The financial markets remain unpredictable and the interest rates are very low and are expected to stay low for a few years.

In addition, the financial crisis has prompted the wave of new regulations and the tightening of already planned legislation around the world. All these mentioned factors plus reserve releases and capitalization of the industry do impact the reinsurance and the insurance pricing. Christian and Matt will go into further detail in their presentation.

Against this background let’s now turn our attention to Swiss Re, our company. We are a well capitalized company, allowing for both business and dividend growth. Our balance sheet is in a good shape. We have an (inaudible) conservative asset portfolio. We are equipped with great underwriting expertise, including own research and development which is a key differentiator as Matt will elaborate in a moment. We are entering the eye of these stormy future well prepared and we are able to support clients on a sustainable basis as well as to deploy more capital to those areas that offer attractive returns.

Now let’s move on slide five, our unchanged group strategy. Here I just would like to emphasize again high growth market. High growth market is not an option for Swiss Re. It's in fact a contributor towards delivery on our financial targets. We are looking to profitably grow our share of business from high growth market from the current 15% to 20% to 25% by 2015.

Obviously, reinsurance and corporate solutions do emphasize with a focus on different countries and to the strategy. But further we build up global partnership focusing on origination with covering on subservient government, international development institutions and NGOs. Finally, we complement our approach to high growth market with direct investments enabling and supporting the business building strategy.

Let's turn to slide six at the tangible opportunities that exist in most product line areas. So where we will find this growth that we are looking for especially in the emerging markets. We will continue on execution to increase our business in the existing markets in Latin America, Africa and Asia and focus on the most promising high growth markets of these areas.

As Monte Carlo is not supposed to speak too much about life and health I won’t elaborate too much on life and health, and from the top three scenarios of slide six I would like to highlight the positives that I have seen in agriculture. Agriculture is an open roof business; it’s exposure to the weather, pests and disease as well as high input cost and low crop prices. It’s also fundamental for our society.

2012 has witnessed difficult weather conditions for agriculture across the globe. It started in the Southern Hemisphere with (inaudible) in South America which meant growth in Brazil and Argentina then a steadier growth in US and in Europe. Russia again reports a serious growth in 2012 just two years after the worse low they have seen in 2010. The impact means that farmers in countries without sufficient insurance protection will suffer much longer from such events. Compared these countries with crude availability where the negative impact is limited, that’s the role of interest and reinsurance. The shock absorber role.

Through security the price against property and sustainable agriculture are all closely linked. Swiss Re strongly believes that through its products and services the financial sector can contribute to these things. Let me just spend one minute on an example from Vietnam. Swiss Re is working with the Vietnamese government on an innovative insurance scheme. The aim is to soften the impact of (inaudible) on farming community protecting against credit defaults. The scheme is introduced in 2012 and already 100,000 households are now for the first time insured against natural perils. Of course, it is just a start. However the potential is clear and not only in Vietnam.

Our mission is to make agricultural insurance products accessible for the majority of farmers to provide them with a reasonable and cost effective type of coverage which is adjusted to their local situation, climate and needs. In other words, into the eye of the future means, for us that we are well positioned to benefit from the opportunities and to help our customers and indeed the society itself to meet the challenges in this stormy environment. That’s how we see our growth.

With that, I would like to hand over to Christian who will talk about driving market force.

Christian Mumenthaler

Thank you Michel and good afternoon everybody. As you know, a lot of the buzz at Monte Carlo is about reinsurance rates and where they will go one-to-one renewals and so we'll have some of our views here, we will share them later but before we drive into that, I thought it would be useful to take a step back and look at the three-year view as that explain a little bit where the forces are driving us?

On slide eight to list some of the key forces which are essential to explain what's going to happen to the prices, those forces that are speaking for lower prices and some forces that speak for higher prices.

This year on the left side I have low interest rates and regulatory changes, both more on the weight of speaking for higher prices and then on the right side you have continuous reserve releases, the [received] high industry capitalization and the low inflation. All of them speaking more for lower prices and in the middle, somehow this net cap have a question mark. So what I would like to do here for a moment is to go a little bit in each of these factors and take a three-year view and you can have then your own view what you think is going to happen to these sectors but I am going to share my own view.

The first factor, low interest rates, you’re all aware of that. On this slide number nine, you can see the black line, (inaudible) in interest rate. Obviously, they went down. You can also see the last three years here the projection, the current sort of consensus estimates. So, the estimate is that rates will stay very low for a long period of time. So everybody knows that.

Well, people put a bit less attention to is the red line which is the running yield of the P&C Insurance. And even its interest rate now stay low for long period of time, it’s going to have a direct effect on the run yield at high yielding bonds are reinvested in low yielding bonds. And so we certainly expect that this will continue to create pressure on net income and ROEs of insurance and reinsurance companies.

Next factor regulation, we all talk about solvency too and old issues around solvency too. I think what people are much less aware of is that there is a full loss of regulations happening right now in the insurance and reinsurance industry all over the world. So we have changes in Australia right now for a high P&C charges but also China, Japan, India, New Zealand a lot of these countries are looking for more risk phase regimes same in Mexico, Brazil, Argentina have some changes, the US have some changes. It’s moving all around and if you look at the underlying intention it’s extremely rare to find one where the intention is to have less capital in the industry.

Actually, all of them or nearly all of them target the higher capitalization of the industry. So this is not tomorrow, these are longer term developments but you’ll see a lot of them come through in the next three years.

Third point low inflation, obviously, has been very low in the past and you can see the market consensus here again the light blue line on page 11, very low inflation for long period of time. That's overall good news because obviously you have the results overall were set with higher inflation expectations. So you have reserve releases coming from that, that's all assuming of the need that claim inflation will go in line with general inflation which always sure.

I think the only thing I would remark to that is obviously the outlook is asymmetrical somewhere we here. So it’s unlikely you get much lower inflation next year.

However, it is possible as an alternative scenario that at some stage you have very high inflation, inflation shocks it’s not impossible. It is just one (inaudible). Reserve releases, it’s hard to get data from Europe so this is the US where you get more granular data over a long period of time.

You can see reserve releases or deficit as a percentage of net premium earned. You can see the good year is actually that was more of a soft cycle but supported by lots of strong releases and then a negative cycle and then again a positive one and you can see the momentum in this positive one it is clearly decelerating and if history tells us anything then it’s quite clear that it will have to end one day. It’s not an unlimited supply of reserve releases we have, it’s more question of when.

Now this is where our three view is more useful than the one year one view because it’s absolutely possible that there is one more year of reserve releases over three years I think is [switched] unlikely.

One of the worrying factors in the US in particular is that you see releases from very young reserves. So very young underwriting years already significant releases being produced which is usually a bit of an alarm bell.

Finally capitalization, so this is really a difficult one because the economic reality for the companies today is that the regulatory capital adequacy is important. The S&P capital adequacy is important and some of them have internal model and very few of that gets published. So it’s very hard to get an overall sense of the capitalization of the market.

So we have a lot of studies you are seeing, a lot of reports what they are trying to do is to use the only publicly available information which is capital IFRS figures and to use very rough approximations the dark line here is basically is the premium levels and the (inaudible) based premiums are to grow in line with risk and then the red line here and that is the shareholder’s equity, some of the shareholder’s equity in the industry as a rough approximation that there would be that this is approximation for the available capital.

You have to support these risks. So, the ratio between these two would be in approximation whether the industry has a lot of capital or not. And as I said, this is a very view. One of the issues in particular is that the lower interest rates over the last three years have artificially blown the gap IFRS capital because they’re for a mark-to-market on the asset side and no mark-to-market on liability side and so you have a mechanical effect. We call it artificial capital, which is just grown in the accounting figures but it is not there in the relevance. If we try to take it out since the crisis and 2008, so the dotted line you see here, it's basically is taking out these unrealized gains on bonds which will disappear as interest rates go back up since both companies are asset liability matched.

And that’s simplified view. Again I don’t claim this is the perfect view but you can clearly see the gap has narrowed the loss in particular because of the recent growth I premium.

We also have a few other indicators you probably have seen the S&P report that was published recently that said at the beginning of the year, there was about $25 billion of excess capital in the industry with excess being defined as above current ratings. And this week we had seven of that. So they also said there is a very strong. It's not an equal distribution of excess capital in the industry. Some parts are stronger capitalize some others less.

So it is a bit of a question mark since we don’t have the full transparency and probably during this year so far, I would expect excess capital to have gone up because it's what good and calm here.

So with that, we can go back to the picture and you can make your own mind up of where these factors will go but this is a bit my view over three year period of time you see lower interest rates creating more pressure on high priority because of run yields are going down. I feel regulatory changes creating more pressure because of the outcome of capital. I see the reserve releases decreasing, I see low inflation staying probably flat so constant factor, industry capitalization question mark, net cap question mark very strongly linked so if you would have large net caps the move will be more brutal if you have no net caps probably more subtle.

So this I would say is my three year view and then what happens within year-on-year is a different matter and depends on some of these factors and when they materialize. So the last time maybe how it’s positioned in view of these factors?

So first one is to low interest though we have a very small casualty book at this stage really retracted in lightened health to (inaudible) any businesses with any guarantees and obviously where match as soon as it can.

On the regulatory changes, we have now five years experience with the Swiss solvency test which is of solvency too measure and we had actually quite positive experience with that so we are happy to help find although it was the adoption process on that and I think we are well positioned.

Low inflation here obviously the protection is on the down side of the risk so if they was an inflation this is protected with our unique adverse development cover, (inaudible) head away then reserve releases we have a quarterly reserving process, not everybody have the same. We have quarterly one and we go, we try to go for a reinvest estimates so not any particular margins in there.

And finally on capitalization is still excellent, we can grow business if we want, if the prices are right and the last solvency test ratio we have published was 213 to 10 so a very comfortable situation to be in.

And with that I will hand over it to Matt to go through the net caps and the net outlook for [101].

Matt Weber

Okay please allow me to properly introduce myself I am the Chief Underwriting Officer of Swiss Re following Brian Gray. At Swiss Re while the Chief Underwriting Officer has changed, Swiss Re’s focus on underwriting remains the same. The underwriting includes of course not just underwriting it includes also out performance from the underwriting side and I would like to share with you the secret of our work our performance, it is based on cycle management portfolio steering (inaudible) and risk selection and in the middle of everything there is research and development.

Research and development is a key differentiator in underwriting and given our traditional and also given science we invest a whole lot in research and development in order to achieve this out performance on the underwriting side. Examples, in property, property is driven by net cap, it will have the group consisting of approximately 40 scientists and what these 40 scientists are doing is basically develop and continue to improve our own Nat Cat model in addition with the models that are available by companies like RMS, [Equicap or AIR]. Having our own model allows us to know exactly what is inside the model to know all the assumptions inside the model. It allows us to compare our model to the vendor models and understand the differences by asking questions.

On the casualty side, we are trying to do exactly the same thing. On the casualty side, we are in the process of developing a Nat Cat like model. We do not yet have it in all the markets at this point in time. We have developed and drove this model out in seven casualty markets. And on the life and health side, we have unparalleled medical data and a group of specialists and this combination of very good data and specialist allow us to make better assessments of the underlying risks. So reinsurance is a knowledge business and research and development provides a competitive advantage.

On the next two or three slides, I am going to focus a little bit on natural catastrophes and the reason is very important, Nat Cat right now contributes relatively largely to the insurance companies bottomline. In addition to that, Nat Cat risks have been growing over the year. You probably are aware of this famous sigma slides which you are seeing on the right hand side and this slide clearly shows the upward trend related to Nat Cat. Given the importance of Nat Cat I would like to show you a little video we prepared for you.

[Commercial Video]

………flood risk of our local environment. However when released our known area then we let detailed information. Swiss Re has developed Global Flood Zones to close this information gap. The Swiss Re Global Flood Zones are accessible to all our clients through the [Cat Nat] information system. If you want to improve your flood insurance solutions than please (inaudible).

[Commercial Video]

That was also a little commercial which we snapped in to this presentation. For items of focus which you might have seen in the background behind (inaudible) are in order to something like this. I would like to share with you now a little example of applied research and development in underwriting through the remainder of last year approximately at this time we all were very deliberately abated by the flood events that was going in Thailand and a little bit later in the year we also developed a feeling for the size of the loss and we probably owe a little bit of the price by the fact that the market like Thailand is able to produce in short flood loss of clearly more than $10 billion.

We were also a little bit surprised to be perfectly honest we underestimated this and when this happened we said, hmm, we have to learn from this. So we used our flood information which we were just in the process of finishing, covering the whole world, is scanned across the whole world over every market and for every market we determine whether the market has similar economic characteristics, not just Thailand, high exposure accumulation with a special weight on industries that are heavily embedded in the worldwide supply chain.

So this determines the flood exposure in every market and when we have done this, we sorted the market according to flood exposure, created the so-called top flood (inaudible) and on top of this list, we realized to put number of these markets were actually high growth markets or emerging markets. Number one position on this list is China. The areas that are especially noteworthy to add are the Pearl River Delta and the areas around Shanghai.

Another example of research and developments applied in practice relates to earthquakes. During the last 24 months, we have experienced a number of earthquakes, very often they’re actually fairly major. One in Chile, one in New Zealand and one in Japan. And after each earthquake, we look at the Cat modeling tools, the vendor tools and our own tool and check how well these tools were able to describe what happened. And what we found was the following.

The Nat Cat model generally is actually a very good job related to the area they are designed to cover which means they did an excellent job determining the material damage due to shock. We also realize that pretty much all the models have much more difficulties describing secondary loss drivers such as business interruption, contingent business interruption, tsunami and liquefaction which was especially a problem in New Zealand. This applies to the vendor models, this applies also to the Swiss Re model.

Now you might ask okay, so why Swiss Re is investing so much in having their own model? Because obviously all the model (inaudible) in certain areas and needed to be improved in certain other areas. The reason is the following: A, of course, we would like to know what’s in science, but most importantly also you always learn of the each event, you always marked out each event.

Whenever we learn something we can change our model relatively comprehended, relatively quickly means it can be two weeks, three weeks, four weeks. Both our interest takes years from the moment they have been signed to implement the change until a new version of the model is rolled out. As a result of this time difference we see our model on average is more optimal base as compared to the situation during their views and their models in order to assess our risk.

I will go now to the second part of my presentation, renewal outlook. As I momentarily described cover the time horizon of the next three years; I am now covering basically the next one renewal with a special focus in Europe by line of business.

In property the most important suppliers of change is the fact that Nat Cat is growing fast. The Nat Cat exposure on the worldwide basis over the last two decades has grown almost at twice the rate of (inaudible) growth. As a result of this growth in exposure also the total amount of Cat capacity that is being or has been growing at a relatively fast pace. And we believe this increase in demand for Cat capacity will continue.

As a result of this increased results, we expect prices for Nat Cat capacity on average to increase more directly. There might be some markets where we see flat renewals, there might be markets where the industry decides to price highest, on average we expect to see moderate increases.

Special lines; special lines include lines such as agriculture, aviation, credit, surety, engineering, marine, including ocean marine and inland marine. That’s relatively big pack of highly specialized clients. Within special lines there is good news and there is also bad news. The bad news first, the bad news is the economic outlook right now does not look that great especially not in Europe. Special lines typically depends strongly on the economy. The economy that’s swell specialized business, that’s well and if this is not the case then it’s the other way event, so that’s the bad news.

The good news however is the following wealth and insurance risks are growing at relatively high pace in high growth markets which is why they are called high growth markets. Typically in these markets specialized business needs that order (inaudible) that’s the first business that starts to take off. As a result of this, we expect to see increased demand in our industry especially in the high growth markets.

Liabilities characterized by the low interest environment as Christian has pointed out. This low interest environment tracks down the ROEs and net income. We therefore believe that we will see price corrections in the market going on in order to increase the returns on equity.

Currently, Swiss Re is underweight in casualty compared to others to the external that this price changes are happening. So we’re prepared to increase our capital deployment in casualty and make our capacity available for selected clients.

And last but not least, low (inaudible) is also characterized by the following macro things, weak economy and regulatory changes.

As a result of this strength, we expect to see an increased demand for capital relief transactions and specialized solution such as external [run] off solutions. In some markets, we have seen rate increases though we know already. We expect other markets to follow.

Summarizing this, Swiss Re is very well positioned in the current environment. Rightful management, portfolio steering, structuring innovation and receipt selection continued to be the cornerstones of our underwriting.

Our underwriting is research based and this is a key differentiator. We expect price levels in the industry to moderately increase and (inaudible) that this is happening we are prepared to deploy more capital in P&C to support our clients on a sustainable basis.

With this I would like to hands it back to Mr. Liès for the summary.

Michel Liès

Thank you very much Matt. So now let me just conclude on slide 26 and if you don't mind it I’ll do that from here. Just one slide before the Q&A session. We will continue to deliver on our unchanged group strategy based on the key implementation (inaudible) that we have defined. You know we have an excellent capitalization at a lowest to both grow our business and grow our dividend.

Regard to our preference of capital management actions versus deploying access [catalane] the business our key priority at similar returns and after regular growing dividend is deploying the capital into business . It is unchanged from our communications into our financial targets where disclosed more than a year ago.

Also unchanged is our method that if capital is to be returned, our current preferences via tax exempt dividend. Swiss Re is well prepared with our ample resource not only in capital but also in research and development capability for last transactions and provide our clients with capital relief report.

High growth markets are nothing (inaudible) but an important contributor both towards delivering on our financial targets. But considering the storm out there to three year outlook indicates upward pressure on pricing.

Finally, our financial targets are and will remain the top priority for us. We are a constant reminder and [incentive] for us to deliver.

With that I would like to open for Q&A session, hence we are ready actually for the first question from the floor if I may please.

Question-and-Answer Session

Unidentified Analyst

Philip Thomas for (inaudible). I am slightly confused by slide 15 which concerns the mentioned reserves estimated at best estimate, now would you be able to elaborate further on that my understanding so far had been that reserves is estimated at 75% confidence level and that in particular the loading on top of the best estimate is what we will generate the future reserve releases. So the question what is the consistency of reserve releases that are already in the pipeline in respect of it would accident years have that approach changed over time? On a similar basis, how do you feel about finding value in acquiring competitors which can be purchased at say a 20% discount over net assets which would create an acquisition bad will and hence an immediate increase in shareholders’ funds? Thank you.

Christian Mumenthaler

I am going to take the reserve question. Since I was the Chief Risk Officer and then I think it was 2006 we made a huge presentation with shareholders about the methodology we're applying and clearly the way we do it, there is no baked in future reserve release at any point in time, it has to be our best asset management’s judgment within a range of possible outcomes which the actions are delivering. Management needs to take a view of what the best estimate is and the methodology is one that it does not react to every little inputs. It would have already appear too clearly if the actual ultimate loss ratio is very different to the one that was originally [applied]. This difference comes in through time which explains sometimes that you have to (inaudible) back. So I think we disclose a lot of that but you know, the reason I mentioned is because we hear different languages from different competitors and in the environment they are in and clearly the one environment we are in the legal and regulatory environment we’re in is very clear. We do best estimates. There is no baked in future reserve.

When it comes to competitors, I think one of the challenges of the large reinsurers is obviously that there is some risk of doubt feeling with [recession] rates. We have a very large market share to generally acquiring anything that would be larger if not very interesting because typically you would lose the business extremely quickly. If you talk about smaller players, that might be an option but that’s not been our focus so far.

Rolf Tanner

Next question please.

Unidentified Analyst

My question really is to (inaudible) and you mentioned one-on-one and you’ve spoken a lot about sort of how you see pricing trends. Do you for see any additional changes in the terms and conditions you might well impose on either new or existing programs in light of lessons learned from may be the last two years?

Matt Weber

There are of course on the local level on the contract-by-contract level always individuals terms and conditions that can change. So this is always happening, on the more global level and important change I see is something we started introducing one year ago it has to do with making sure that we comply with international trade controls and it’s a progress, it’s a process which has started to progress very far at the last renewal and this is a process which we will continue to the next renewal.

And other thing which we would like to achieve and we will not achieve this overnight; it takes a couple of years to get there maybe even a little bit longer. It has to do with creating transparency related to [company insurance] business interruption.

Company insurance interruption industry the insurance or reinsurance we know its big, it could potentially be big, we believe so far we were quite lucky we haven’t seen a really big losses but we are quite worried and concerned that's this could actually change. The problem is with respect to company insurance business interruption the transparency in our industry is somewhat limited and we will work with our clients trying to increase this transparency. There are a number of other things but from my perspective these might be the two most important for us.

Rolf Tanner

Please limit yourselves to two questions.

Unidentified Analyst

There have been three chief executive officers in recent years and the last change over before your changeover has seen a dramatic rewriting of the course of the company has been taking, is this another trend of course now from Lippe to you, judging by the presentation you gave early that we see a quite a strong emphasis on growth and growth being without alternative and that always followed by the same and yet it must be profitable. Well I think liberated other way of around didn’t he?

Michel Liès

So there is definitively you know a strategy which I described you the one which I clearly established before I joined as a CEO, as you know the fact that we are looking for growth opportunities were related to the fact that we want to expand, if I may say it vastly in area in which we are not strong like corporate solutions and I do believe in the high gross market we are definitively growth opportunity that we manage from innovation and not only from price. In the matter of cycle management, there is absolutely no change in our strategy. We simply do believe that first, we are taking advantage of having been quite strict in the previous cycle and we can probably take more advantage in the competition when the cycle is going in the right direction but we do not exclude some if may say what is currently big niches of potential growth that we will exploit in the future. So growth is not becoming our A and Z; we're definitely keeping track of the quality of our underwriting and the quality of our cycle management.

Rolf Tanner

Okay. So I see there are no questions on the phone so far. So we’ll continue with the questions in the room (inaudible)

Unidentified Analyst

I have two quick questions if that’s okay. First of all, are you interesting in buying Generali’s U.S. life reinsurance business as has recently been reported and secondly can you give us any guidance on your exposure to Hurricane Isaac? Thank you.

Michel Liès

On the first one, probably I can maybe talk, no. Matt for the second one?

Matt Weber

On the second one, we are still counting the beans. However, what we can say Hurricane Isaac was not pre-closed and Swiss Re will not end up with a loss in the region where we would have to make enough disclosure.

Rolf Tanner

Okay, next questions. The gentlemen in the shirt over there? Could you please identify yourself?

Fabrizio Croce - Kepler

Yeah it’s Fabrizio Croce from Kepler. So I have actually two questions. The first one is about amount of risk. It's interesting to see how reinsurance industry is reinventing after high claim or an earthquake and you’re seeing some of relief which are not seeing so far and this is actually is easy to model and so also to feature in. The question is how do you treat the other risks; do you simply charge an additional price on it’s a rule of thumb some sort of metrics or do you simply refrain to write this business because I don't understand, I couldn't it model and so I simply leave it on table?

The second one is about the inflation; you have currently the shoulder which are free thanks to the (inaudible) and there is a development cover, but this is expiring. So the question is what are you doing or what are the plans going forward to have the inflation chapters still have color and if you could even give an update on US drop in pace?

Michel Liès

Right. I will take all that were actually three questions, right. I noticed okay, the first one model risk; when I started working for Swiss Re 20 years ago I contributed to the Swiss Re Nat cat model at that time. Therefore I would like to say every model is always wrong; it never really reflects reality correctly; what is important however is that the uses on the spend there, the model does a decent job and where the model actually fails to do a very good job.

As we have (inaudible) tail risk of course is a concerned tail risk is at the far end of the loss distribution, so by definition every model there is subject to a very high degree of uncertainty. In our industry is actually in my opinion does a fairly decent job dealing with the tail risk for instance in non-proportional reinsurance there is the concept of minimum rates on lines which means if the models expect the loss of reinsurance the year terms out to be extremely small and the players in the industry say, well, you know what in – this is exactly the reason where all the models are wrong and then charge by minimum premium no matter what the model says.

Inflation; inflation is of course the risk that applies to everybody, be it the insurance companies or reinsurance companies. In a certain way we actually like inflation. We like inflation because we have to wait and see and products being offered, so that’s one reason; but we also like inflation because inflation is part of our business; that’s part of the reason why which is our job is to take away inflation from our clients.

And given the size of Swiss Re, given the size of our balance sheet, we actually have an advantage taking on both inflation compared to others, so while it is a concern for everybody, it’s less than a concern for us and therefore we actually look forward to it.

And what was the third question, I forgot, sorry for that. Yeah US drop; US drop is happening so for sure there will be [losses] in the US; however the total amount will be now only in October or early November that’s when they come up with these actually, they will be settled and as such this is an event which is still going on and I will prefer to comment on each one of these entities over on, not right now when the event is still going on.

Christian Mumenthaler

Yeah, maybe (inaudible) it's going to stay there for more like ever. So it was like being covered, in the money, the first is didn’t impact our P&L and went for the ADC. Now all the reserve releases were outside of it. So if we have future inflation, so it will first go back to up to that cover. So we will have adverse development for I don’t know how much of it is now of more than a billion and then you have (inaudible) protection. This is how it works.

Rolf Tanner

Okay. There is still now question on the phone, maybe we will continue here in the room. The gentlemen in blue shirt here.

Christian Muschick - Silvia Quandt Research

Hello. It's Christian Muschick from Silvia Quandt Research Frankfurt. Two questions from my side. The first one on volume, so I guess, similarly in (inaudible) you would be ready to CapEx volumes if you don’t meet, if the business doesn’t meet your prices. Do you believe this will be necessary this year or do you rather expect a decent volume growth as well additionally to the price increases or favorable prices at least?

And the second question would be on business structure. Do I understand correctly that you go into more volatile pockets of business so with and potentially higher net cash barges for the coming year. So should we expect some higher earnings volatility from that side or is that not the case?

Michel Liès

So on the volume side, it's a little bit (inaudible) if we said, we expect prices will increase moderately and we will come on our volume or we see a risk of having to cut down the volume because prices that will drop now. Prices, we expect them to increase and together with the price increases, we actually expect our exposure to increase with the price levels. Volatility of business in a certain way we given our advantage on the writing we actually like the top risks.

Because we feel not everybody can assess them and can take them on board and we can, so as such we actually like the basic risks and we are writing them but we are writing them in a very controlled way and we will continue to try to make sure that you don't experience (inaudible) volatility coming from the risks we write.

Having said that, however, for instance related to net cap based on our book we‘ll know that on average we make a good amount of money or out of (inaudible) that net cap and on average in 20% of all the years we are expected to lose money, and if you just look at the quarterly results the volatility is even bigger. And this is okay that's part of our business model.

Christian Mumenthaler

Just to avoid any doubts on your first question. I think you know everything, everybody, every compensation system everything is tied to economic bottom line. There is no, volume doesn't exists; it’s really totally absence of our thinking. So it’s all about maximize that and so should our best estimate of the future not come true it’s absolutely possible to weaker volume, absolutely has to be great experience.

Michel Liès

We experience that in the past that's volatility one point I would like to add is that’s probably a philosophical comment. But if, as may I see if we control the volatility, we'll preferred the volatility with average result above the profit line than non-volatile business which is definitely non-volatile below the profit line and I must say volatility in that perspective not necessarily a bad thing. If you are able to measure it and non-volatility can be a bad thing if you are non-volatile at a level which is a disaster. There is not of lot of advantage of being non-volatile if I may say.

Christian Muschick - Silvia Quandt Research

Thank you, but will it rather be stable year-on-year or do you rather expect an increase in volatility or volatile business portion?

Michel Liès

The volatility though stays stable relative to the capital we have.

Rolf Tanner

I think we have time for two more questions. So gentlemen, second last row.

Unidentified Analyst

I am [Prasad] from (inaudible) just about when you are thinking about you know who you are going to deploy your capacity next year. I mean could you tell us if there is if in some markets or in some specific risk, you have already reached the maximum risk appetite you have? Thank you.

Matt Weber

There are areas where we have very little appetite actually to be engaged for instance, procedural value insurance, we just down to it. We have no appetite for that within causality for instance professional lines, financial institutions. This is an area where we have almost no appetite and answering your question in these areas we have reached our appetite already and we will not see this expand getting in those areas.

US caps, it depends. We like, not the competition. Some dealers have this portion of net cap business. You are aware of the fact that Berkshire have right quote per share. It's going to expire by the end of this year. We have replaced the necessary hedging that was provided by the Berkshire Hathaway quote per share, already for the US Hurricane and California earthquake. This means we do have room to grow if the price levels are attractive enough for us to do that.

Rolf Tanner

Okay, and then the last question, very short one please. The lady in the back.

Fiona Robertson - The Insurance Insider

It's Fiona Robertson from The Insurance Insider. I was just wondering. You were talking about the an expected increase in demand for (inaudible) cover and I just wonder if you could talk about whether you expect to share that increasing capital was the alternative markets anymore than you do it at present and also if you have to put alternative market capacity on that kind of scale that you had Christian, pricing, where would you put it?

Christian Mumenthaler

With alternative markets I mean I elect capital these types of things.

Fiona Robertson - The Insurance Insider

And characterize ---

Christian Mumenthaler

Yeah okay. So I think we all know the cap business is generally extremely attractive. It is growing a lot. It is typically growing more than the capital base of the whole reinsurance industry. So maybe the 10% per annum and therefore it had happened in the past as you would have to move the players being for (inaudible) etcetera and I think what we see today the increase use of high led coupons or all the vehicles its probably today’s form of this (inaudible) and if you don't see new and it’s been created you rather see capital entering through that door.

And I think this is obviously it might take away a little bit of the profit but it is extremely discipline capacity. Because it seem more time constraint than it will be in order, the creation of a new competitor who then stays through the whole sub market, I would expected its capacity disappear immediately if the prices are not attractive enough. So as you know, we are participating in these markets. We are very active and overall we see that as it profit net positive.

Rolf Tanner

Okay. Thank you very much. Ladies and gentlemen this will conclude Swiss Re’s investors and media conference. If you have any follow-up questions please feel free to call in Investor Relations, Media Relation or send us an e-mail thank you all for participation. Operator we are now concluding the call.

Operator

Ladies and gentlemen the conference is now over thank you for choosing the chorus call facility and thank you for participating in the conference. You may now disconnect your lines. Good bye.

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