Zurich Insurance Group AG
Q1 2022 Earnings Call Transcript

Published: 12 May 2022

[Operator:]

Ladies and gentlemen, welcome to the Zurich Insurance Group update for the three months ended March 31st, 2022, conference call. I am founder of the quarter's call Operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions]. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Jon Hocking, Head of Investor Relations and rating agency management. Please go ahead, sir.

[Jon Hocking:]

Good afternoon, everybody. And welcome to Zurich Insurance Group's First Quarter results call. On the call today is our Group CFO, George Quinn, but before I hand it to George for some introductory remarks, just as a reminder for Q&A. If you keep your questions to two each, that will be much appreciated. George.

[George Quinn:]

Thanks, Jon. Good afternoon. Good morning and we thank you for joining us. So before we start the Q&A, just want to give you a few comments. So as you've seen from the press release today, grips set a strong start to the year with good growth across all the businesses. Strength and resilience of the balance sheet also gives us confidence in our ability. The successfully navigate an uncertain macro and geopolitical environment on this performance combined with what you saw in the last couple of years, means we don't try to exceed all of our targets for 2022, which has all no final year of the strategic cycle. And the first quarter, our property casualty business has continued to perform strongly top-line growth of 8% on a reported basis, 12% linked like termed by the continued strength of commercial Insurance, where we've seen rate increases of 9% in the quarter. And North America, we've seen particularly strong growth with GWP up 17%, driven by combination of underlying growth, the crop business, and rate increases of 9% and that market. Although rate increases of moderated somewhat from 2021, I think as we expected, there are saying stabilization at that high level. And we see that continue into April. Rick confident that margins will continue to expand well into 2023 despite the inflationary pressures. Like business also performed well, continued focus on unit-linked protection product, least the strong growth and new business volumes. And while the new business margin was lower than the high level that we reached in the prior year, this was due to mix effects within our preferred segments. And despite the market volatility, we remain confident that our life earnings guidance for the year will hold. Farmers Exchanges, which are owned by their policy holders grew GWP by 29% benefiting from the inclusion of the acquired MetLife P&C business, which was completed at the start of Q2 2021. There's also strong underlying growth in the mid single-digit range in line with the guidance that we've previously [Indiscernible]. Balance sheet remains very strong with solvency test ratio estimated to be 234% to the end of the quarter up from 212% at the beginning of the year. And the underlying development has benefited from the rising yield environment. As you have seen today, there's a temporary benefit of [Indiscernible] points from a title hedge that we've put in place over the assets just given the heightened risks that we see currently. With that, I think we can start the Q&A.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Will Hardcastle from UBS. Please go ahead.

[Will Hardcastle:]

Hi, everyone. And thanks for taking the questions. The first one is just relating to statement, it should be running in excess of loss trend well into 2023. This first will not just combination about you thinking about lot on our written basis as opposed to an end? And what gives you this so much confidence despite what must be elevated inflation levels and have assumed some pressure likely to arrive given the investment yields have risen so much? The second one, it's actually a very high level walk. But just can you talk us through the rather than a attractions like now, the commercial versus retail P&C gross. Essentially, it's really thinking about where you'd rather be putting incremental dollars of capital right now, even though I appreciate you got plenty of capitals, there's some final constraint. Thanks.

[George Quinn:]

Thanks Will. So on the first one, so yes, I confirmed that it's a written perspective from an end perspective. Why the confidence? If you look at our numbers -- the numbers that we produced internally, we've -- I mean, we've frequently turned out to be far more pessimistic than the market outcomes. And in fact if you look at this year, we would have -- we would have expected to be lower in rate terms than we already see in the market. And of course, we had a continuing trend down. As I mentioned in the introductory remarks. I'll give it a few caveats, but the numbers are the numbers, things seem reasonably flat from a US commercial perspective through the quarter, and in fact, into the beginning of the second quarter. So if you look at April numbers, so the rate for the time being at least seems to be holding around that level. If you look within it, there are pockets that are even more positive. So for example, Cyber pricing is showing huge rates at the moment. And in fact if you allow for that, you might actually see a take up, and if you look at some of the commercial -- the external commercial statistics, I mean they may have that picture in them, but given the proportion of side that we write it's not huge driver for us. So I think it's a combination of what we've seen already through this phase of the cycle. The early trains that we've seen this year that are more positive than we expected. And I think also the -- I mean we've had some of the most significant U. S. industry meetings, there's tons of discussion around inflation. I think those interests, some nervousness that people should be careful around it. So I think the inflationary environment will sustain rate for longer than we might have anticipated. So all of that is what drives the confidence. Where would we deploy incremental dollars on commercial versus retail is -- I mean, it's an easy theoretical question. I need quite difficult, practical question. We've talked through this hard phase of the commercial market, but we have a distinct preference for that taken rate on the risks that we know and continue to be cautious about the new risks or the risks that shuffle around the market. I don't think that stance is going to change. I mean we do -- we obviously have new business in the mix. But mounting a significant push on commercial growth, I don't see us doing that, the market is continuing to bring us a quite growth through rates, and I think we'll continue to focus there. The only exception to that would be the things that we've identified previously as priorities for the business. So the mid-market activity we undertake in the U.S, some of the things we're doing around SME which has maybe been more retail and a particular accident hill. As we look to the future. On the retail side of things it's still a more challenging market. I think the -- I mean from -- I think is laced on predictable in terms of judging the lightly outcomes. But it's also currently less profitable by some reasonable amount to pay it to commercial. I think -- I was play a bit more optimistic until around the February side, I'd thought we start to see the market respond more rapidly. I think the retail market is still running hard to catch up on inflation. I think you'll still see momentum start to rise, and then price on retail. And I think there is a point in the future, were retail will start to become a firm more attractive opportunity, then Perhaps as rate at this moments. So preference would still be for commercial, but we're quite happy to take the rate for growth for the time being.

[Will Hardcastle:]

That's Great. Thank you.

[Operator:]

The next question comes from Peter Eliot from Kepler Cheuvreu. Please go ahead.

[Peter Eliot:]

Thank you very much. The first question, I guess it's a continuation of that topic, actually, George, you mentioned inflation in your opening comments. And again, just then -- but I was wondering if you could just give us a bit more color on what you are actually seeing on the ground in terms of the various forms of inflation that you think are particularly relevant for your business. That's for the first question. Second one on solvency. I mean, I'm sure you're constantly doing a sort of cost benefit assessment of hedging and your exposure to markets. But I was wondering if you could give us any insights into what might drive the decision to move your risk appetite back to a normal level other than the obvious sort of cost implications. And I guess, when that nine points, -- about nine points will disappear at some point, but you've also got, potentially 11 points coming from Italy, and that has changed likely. So your solvency is -- shouldn't really fall much from the current level. I'm just wondering, at what -- well, how you think of it in that context? Is it too high in here? Is there things you can do about it?

[George Quinn:]

Yeah, thanks Peter. So inflation and what's relevant for us. I mean -- I think from a risk perspective, I mean you're familiar with -- I mean the classical view of inflation risk. Clearly in the context of our P&C book. But we don't see a classical inflation scenario impacting our P&C book at the moment. And if I'd -- if you look at the book overall, workers comp continues to be pretty benign. And so it's not causing significant stress. We talked before about the changes we've made to MX there to try and give us -- think is a bit further away from the risks than perhaps we have been previously. Liability is still dominated by social inflation, which for me is almost entirely a different concept. What's the net result the where you actually see it is, mainly in short-term line, short-tail lines. You see it significantly more, whole, so multi-haul, also physical damage. We see in property and retail, you actually see in European markets, which is something we haven't seen for some time. I think the positives for us is first of all, I mean, we didn't come into this year assuming that the the so-called -- the expectation of inflation spike mandate, and inflation would be behind us and we're already at this point. We carry some pretty significant loss cost trend assumptions into 2022, so we're not caught by surprise by any of this. And I think probably the other thing that's important to point out is especially when you think about the retail business, if you look at the year-to-date, half of everything that we've renewed and retail is Swiss gives us some shelter from the inflation unpacked that you would have had if you maybe lay several wake thing to this particular market. We said that, but we're not complacent around the topic. We pay particular attention to it. I think the relevance for me is still more around those long tail topic. So we pay far more attention to the risks that we start to see more of a merge there. And for the short tail we'll deal with that as you'd expect, through pricing. So it's clearly a key topic and it's going to remain a key topic for the industry. Nothing really for this year solvency risk, upside. So you highlight the numbers correctly, we have nine points of temporary benefit from what we've done from a tactical perspective. One reasonably important comment around the back book topic, you pointed out what we've previously disclosed around Italy, I would say that collectively the market has expectations that you'll see more from us during the course of this year. And just keep in mind that -- I mean, one of things that motivates us on that back book, is the sensitivity that some of those portfolios gave us to interest rates. When interest rates rise, if course they give us part of the benefit that one of those transactions would give us if we do in the future. A long-winded way of saying that if you're anticipating another transaction coming, be careful about Double-Crane versus the interest rate benefit that we already have. I think overall it's good news because it means that of course, we have the resources readily to high-end when we need them to address some of the issues that we need to deal with when we complete one of those larger back boot topics. So on risk appetite, no real, but no real change from us, but you've had from us before that's with an earnings dilution event at some point in future, we expect we'll deal with that through capital management. After that, we would prepare to support growth in the business. But we take the ROE Kohl's seriously and it wouldn't be expectation to operate a very high capital levels over extended periods. I appreciate it's not very clear answer, but it's a restatement of what you've had from us before, and not first step around the [Indiscernible] because, the most important thing for us want to get that done, and then we can talk a bit more detail about Capital Management.

[Peter Eliot:]

Great. Thanks very much.

[Operator:]

The next question comes from the [Indiscernible] Morgan Stanley, please go ahead.

[Louise Miles:]

Hey. Good afternoon. Just two questions from me too please. On the FAF, it study with something that will set actually early. Thank you. Said in the release this morning, the expect right so it see exceed loss trends, low you help cost trends while into 2023, does this still mean you expect peak commercial lines earnings to happen in 2023 or not being pushed out. And pecan exotic, [Indiscernible] 2023 or around that does not mean we should have seen that any kind of leveling off for decline in earnings that will be offset like price and the Breetz outlines business? That's my last question. And then the second one I think a full-year results. You said you expected the P&C investment income declined by $50 million during the CIA, is that appropriate given where rates of need team? Thanks.

[George Quinn:]

Thanks, Louise. Yes, it's a good question. First one, the -- so maybe if I can re-frame the question, apologies for doing that. So if you're really asking me, do we now expect to push out the peak margin point a bit further than we've guided before? The answer would be, yes. Whether that's end of 202, early part of 2024, really quite difficult to judge the stage. The -- I mean, the combination of loss cost-trend. issues driven by inflation, the more optimisticly we have around rates would cause me to expect -- to see that peak launch and point push up at beyond. On retail growth, I don't think it's going to be all retail growth that offset some of that cycle effects. I think there are things we can do within the commercial business. Highly to some of the strategic priorities we have within the business. In response to one of the earlier questions, those remain true for us. We believe we're underweight in a number of these areas and we do believe that we can profitably grow into them. So that will also help deal with some of the cycle-driven impacts and the launch of end of corporate wind up point when that point comes. I do expect that retail growth will also help. Again, I mentioned earlier when we're talking about Peter's question on inflation. I think you'll see retail markets respond more strongly to the current trends. I think we're relatively well-positioned to benefit from that. On the P&C investment income, there's another good question. We haven't quantified it today so I'll probably do that for the half year update in August. But what seemed clear to me the drag that we -- the guidance, been given around the drag on investment income because of the lower reinvestment yields. That's going to reduce -- is reducing. If I look at the current gap on reinvestment versus [Indiscernible] year on P&C, it's about a quarter of what it was last year. So the gap is closing very rapidly, which is generally beneficial I think.

[Louise Miles:]

Okay, thanks.

[Operator:]

The next question comes from Michael Huttner from Berenberg. Please go ahead.

[Michael Huttner:]

[Indiscernible]. Thanks for taking the question. The results are so good. Well done. You must be delighted. I just wanted to [Indiscernible] the high level question, which shows I'm really nothing. Amazed by the results is what you worry about now, given that everything is delivering. It's not as you're lucky that you have worked very hard. So that'll be one of the k ind of following question, I guess. And the other one is a continuation on the previous one on the -- when the peak [Indiscernible], When is peak cash flow? Because if I think about it, so pricing is ahead of [Indiscernible] is ahead of earned prices, ahead of that margin, and my guess is that head of cash flow, so when do we get the higher non-cash? Is it '24, '25 ', '26, given? [Indiscernible] two questions, and really well done you make it. Thank you.

[George Quinn:]

Thanks Michael. On the first one, probably they're all the same things we've worried about before, to be honest. There's not a particular issue in the company that needs particular attention, but in the same way that you have high expectations as we have high expectations of the business. And I mean, we're doing everything we can to make sure that we support them with the resource they need to take the benefits of the current environment, support clients. It's a bit of a cheesy answer, but I think you worry about pretty much everything, all the time and reality. But given where we are, we are in a good place to have to worry about things. On cash flow is -- I think for me to answer that question, I'd have to anticipate some of what we will tell you at the Investor Day in November. So if you bear with me, when we come to November, I will give you a sense of what we expect cash flows to hit. I'm not necessarily sure. I'm going to identify particular peak cash flow point for you at this stage.

[Michael Huttner:]

Okay. If I try to ask an interesting question, how about this really simple one, what is the IFRS capital? I think [Indiscernible] gave a number which is 9 billion what is this IFRS 17 how much would it be for Zurich?

[George Quinn:]

Can I also hang onto the service we obviously through our process at the moment, 5G will just high? Immediately after Q1, companies have reported that transition balance sheet, we're going through the process of kicking the tires on that will however, order to take a look at it. And our plan is to disclose that to you guys somewhere. And later in the year. So I mean, will come with me something that's pretty well fated and prefer. But we're not yet in a position where I could tell you what it is an explain to you. The drivers. So again, Michael, apologies, but we'll come back.

[Michael Huttner:]

No. It's so fun, not really good question. Thanks so much Louise (ph) and you're really welcome.

[Operator:]

The next question comes from Andrew Ritchie from Autonomous, please go ahead.

[Andrew Ritchie:]

Sorry, I have a very basic question to start with, and also I think it's been asked yet. But George, could you just give us a flavor for the loss experienced in Q1 particularly cat and large loss. I guess the way to frame it, not going to give us actual numbers is versus budget versus expectation versus planning. Just some sense. So that would be useful. The second question. Coming back to inflation on a different angle. Firstly, I just confirm I think is the case your renewal rate is pure rate. It doesn't include any natural indexation effects. And I wonder if you could tell us roughly what percent of your non-life book has what I would describe as natural inflation indexation elements within it as I'm thinking, for example, things like payroll, workers, comp, property reconstruction value. I'm just trying to get a sense of what the -- because we focus a lot on headline renewal versus loss cost. But in reality, there's a lot of natural indexation going on. I wonder if you just give us sense. What portion of your book house that, and I'm assuming that's a particular focus area in renewals right now to ensure the indexations happening correctly.

[George Quinn:]

Yeah. Very good, so on the first one, loss experience in Q1, we typically don't break out that large, from attritional we discussed why in prior quarters. I don't see anything particularly unusual beyond what we'd expect to see. I mean, the large component always has a touch of volatility that can equate to -- but if you compare one large loss experience as today to what we saw say 3, 4 years ago, it's much lower. So it continues to reflect more recent trends, the large component. On the CAGR activity topic, it's -- do we ever have a normal quarter? This quarter, we're relatively late in the U.S. We're very close to expectation in Europe and were high in APAC. And that's entirely driven by the eastern floods in Australia. If you look at the totality, I mean, overview is we would hold to the guidance that we gave at the beginning of the year. So we're still expecting about 3.5 points, and one of the most important drivers of that is what we're doing in the U.S. We talked, I think at the investment and again, back in February about what we're trying to do on the large end of the business in the U. S. crystals from the team have accelerated tight activity. We're going to be ahead of schedule on a number of those changes, and in particular, we're trying to push a little that through ahead of the relatively important July one dates in the U.S. So I mean, from where we stand today, no change what we said back in February, and in fact, the increased activity that will go underway around the U.S. will certainly help us reach exposure. One last comment. I mean what we've done on the U.S. over the last nine months or so. That's a concept we are going to extend to the entire Group. So we've just -- actually a few weeks ago, I'm sending you targets for cat capacity usage across all the territories. They are differentiated given the different risks that the business brings us, but we are serious about further reducing exposure. But again, the aim of this, is to try and make sure that we maintain on average over some reasonable period, a contribution from cat losses along the lines that we've been trying you to expand.

[Operator:]

The next question comes from Camara Hussein from JP Morgan, please go ahead.

[Camara Hussein:]

Two questions, the first one is just informers, I guess adjusting for kind of, I guess acquisitions and kind of everything else going on that underlying growth was about 5%. Just wondering, kind of given that the backdrop informers kind of what we should expect from here, and the second question just on, I guess on the hedge that you've put in place, will there be any dampening effect on investment returns in the near-term whilst that hedge is on. Thank you.

[George Quinn:]

Cameron, can I apologize because Jon just reminded me. I dodged the second half of Andrew's question. So I'm going to answer that, I'm definitely going to answer you -- I'm going to try and remember to answer your two questions as well. So apologies Andrew. The second question was about inflation from different angle. So the indexation effect. So I don't have a precise number in front of me. I mean, as you would expect, we have lots of activity taking a look at it. And I think the -- if you look at the book, it splits into a number of lines that they have activity drivers on premium. And there's - I mean, this point many more lines of business than most people would expect. So I think you anticipate around things like workers comp, where's there's clearly a payroll connection. And even the Swiss accident business also has elements of the similar drivers in it. We even have things like crop business because we said that by reference to crop prices for the predominant crops that we cover in February. The one -- I think the thing that we're trying to do is to make sure that -- I mean, if whether are closes in contracts that -- they maybe not formerly indexation closes, but they can be driver of premium or of exposure. And the classic example would be TIV, total insured value on the property book. We're making sure that that is being automatically updated. We want to make sure that we don't end up in a position where number one, our client is under-insured because the information's historic. But we have been making changes to the internal processes to make sure that the inflation that can be impacting exposure even things like property that's properly reflected. So I think the amount of indexation that's around beyond the pure activity drivers that tends to be more of a European topic than a U.S. topic, but in reality, most contracts have some form of recognition mitigation, or other inflation feature. And we're just trying to make sure that the underwriting process that we run properly reflects that then the exposure off-price that we offer to clients. I so appreciate the patients Camara, so back to you on your two questions, so on [Indiscernible] growth from here, so, I mean, we've given guidance for the full-year, including what you've seen in the first quarter of mid-to-high single-digit, I think as we go into next year. It's a -- it's slightly harder to tail. I certainly don't think it will slow down. The -- I mean, the auto market in the U.S. is [Indiscernible] oil, but the moments you've seen -- you've seen frequency and severity from income back in spades. I mean, entire market is scrambling for rate. I mean, you guys you understand how the rate system works in the U.S. So -- and almost all states, some kind of process around that to varying degrees of complexity and difficulty. And I think it's some markets, it's going to take quite well before rate catches up with the current loss cost trends. So I think there's a very positive aspect for us, which is the impact that's going to have a growth quantum for next year. I don't have a view on that today, but I certainly wouldn't be gating lower than the underlying level that we're seeing for this year, than the one Noah (ph) cautioned and I think you see this again across the entire markets. I think -- I mean, even the largest players are quite cautious at the moment. There's less interest than your business has more interest and making sure that the rate is adequate. So I think it's generally a good in position for farmers. I think the rates particular will help. I guess should have asked you a question is, I would expect growth to be at least in line with a more normal kind of mid single-digit territory for farmers for next year. Thanks for the hedge on investment income. So of course it's not free, it actually run through investment income. You'll see it essentially. I mean the premium payable, in a few years everything is fine, simply wind-down through mark-to-markets and realized gain losses over the course of this year. I mean, the cost of it is not that huge, and I expect we can manage that within the normal gains that pop up through active management of the portfolio, but no impact on the reported yields, at least.

[Camara Hussein:]

Thanks George.

[Operator:]

The next question comes from Melium Hofkin from KBW. Please go ahead.

[Melium Hofkin:]

Hi, George. Thank you very much. Can you give us a bit more information please about how you're booking your statements about Ukraine? Are you --have jumped up to number you're saying is significant, but are you making these considerations with regards to expected ultimates or are all you booking these things as they're incurred? Because at the end of the day, I appreciate this might not be significant, but most commentators are still talking about a $10 billion-dollar mid-sized cat event. So I'm assuming that there are losses Zurich is getting. And in your statement you are drawing a clear line between the industry and Zurich so can you just remind us some of the key differences of why you might be in a better position relative to the average for the industry? And then secondly, please, thanks for all the stuff you've said so far about inflation. Could you come back and just talk a bit more specifically about social inflation? You mentioned it, but didn't talk much about it. My take from, for example, the litigation finance players is that to all intents and purposes, the U.S. court is still shots, which is fine for now, but it may mean there's kind of of dam that is building up ready to burst. So I don't know how you feel about that. And adjunct to that question, we don't often talk about it, but what is your house view about litigation finance as an asset class? Is it something that you completely steer away from because it's a systemic risk for claims inflation, or is it potentially a tool for you to be hedging your exposures over time? Thank you.

[George Quinn:]

Wow. That's the first time I've had that question. So on the different components, so on Ukraine, first of all, I mean, you can see my comments as a future ultimate and rather we haven't said anything yet, maybe some events in future. So why would we have that perspective? I mean, if you look at what's expected to drive losses, I guess the most commonly identified ones would be -- I guess the issues around the aircraft leasing, which of course as well beyond our expertise because we're not present or no market, political risk, which is a business we've been running down since, I mean actually, two or three years ago. I mean, credit to some to some degree is going to be impacted. War risk, which again is specialty line of business. So I mean, I think in the end it's a reflection of decisions we've made in the past about things we're capable -- capable of underwriting or not, if case may be, have that just led us to conclude that -- I mean, obviously with no particular foresight that we're going to have Ukraine. We would [Indiscernible] to some of these lines of business. So I expect us to avoid any significant FX from it. So, I mean, that would be the short answer. On the inflation topic it's -- so I don't know that to completely agree that the core system will basically shut. It's still slow I think. I think the -- there's an expectation which I think is well in line with common sense that as we see the activity build, you will see the more likely winning cases come through for us. So I think you are allowed to see some type of bump early in the process around social inflation, and trying to draw a conclusion of what that looks like through the unwind of the entire back bone. I think it'll be a difficulty for the entire industry. But bottom line there is no evidence currently that there's an entirely different outlook for social inflation. But I except that, there is not a lot of evidence yet to prove it one way or the other. On the litigation finance topic, the -- it's an interesting issue, in general, where litigation finance shows up in a significant amounts. I think our primary considerations are probably about the underwriting risks rather than about the asset class as a hedge. And of course it would be -- it'd be a bit like biting you're own tail if we were to throw a lot of money into it. I don't see as a topic where you would see us come to the conclusion, there is an upside for us to be a heavy investor in that topic.

[Melium Hofkin:]

That's great, George. Thank you.

[George Quinn:]

Thank you.

[Operator:]

The next question comes from Thomas Fossard from HSBC. Please go ahead.

[Thomas Fossard:]

Oh, yes. Good afternoon, George. Two questions left on my side. The first one will be, on the underwriting margin trend, could you focus a bit more on what's going on in EMEA in Europe, where you're showing -- and especially on the retail side, where you're pointing to 2% rate increase, which seems to be running significantly below where costs inflation is trading at the present time, especially maybe in the UK. So just wanted to better understand what's your view, and if you were to expect any pressure on underwriting margins in the short-term in your reopened book. And the second question will be more related to the U.S., and regarding to your own cost related to a wage inflation. I mean, how things are going there? How can you resist the wage inflation in your own company? Are you subject to be quit bigger resignation in the U.S.? And then what about the talent pool, I mean, how things are going on shipping up in the U.S. for your business? Thank you.

[George Quinn:]

Thanks, Thomas. So the net math, I think I think if you look at all of Europe and do you think about 2% increase, and you think of the headline inflation rates? I mean, I would agree that there's no way that's positive for margins. However, I think a couple of things that you need to bear in mind. I mentioned earlier that, I think it's almost fully half of the premium that we've renewed year-to-date is Swiss. So of course, I mean well even in Switzerland, inflation is maybe a bit higher than we've been accustomed to in the past. It's note like the UK is not like Germany. And of course, strength in The Swis Franc acts as some offset to some of the risk of important inflation here. So I think when you look at Q1, just be a little bit carefully, you don't extrapolate to too much because it's a fairly significant portion of what we're reporting here. I think the other thing that continues to help with the margin, too many margins in this answer, but continues to help, I guess we still see, I guess, what we used to describe to some degree as the frequency benefit. I'm not sure I'd call it frequency benefit anymore, but there's still some absence of frequency. And the actual loss-cost experience compared to what we would've anticipated to the point of pricing. And I think it's this combination that for the time being, means that retail doesn't suffer the effects that you may expect like a 2% rate increase. And maybe take a loss cost trend or inflationary pressure point more than two times down. So I think it's the combination of mix, combination of continued benefits on the frequency side of the claim experience. That means it's not actually putting pressure on margins. What it does put pressure on is, growth in some markets. So be cautious around some of the -- some of the European retail markets at the moment, and we probably tend to shrink some of the marquee, say retail lower till retail motor markets, and more towards some of the mass consumer business that we have in Europe that has a bit less of the same issue. Second by question, operational cost inflation, yup, it's a challenge. I don't think I necessarily limit that to the U.S. If I look at what the U.S. team has done,

[Jon Hocking:]

I think they've handled it in a relatively smart fashion given the pressure. We put through what, by historical standards, would be a pretty significant increase across the board. We've added on top of that, are more targeted increase for particular high demand skill groups. The obvious ones being people who are involved in the underwriting process. So underwriting and some of the pricing actually is to avoid we suffer and unwanted attrition. I think we've always been helped in the U.S. that some of the things that again crystal for some there, some of the restructuring that's taken place, that has created some natural expense benefit. We can't do that every year, but it's certainly enabled us to weather some of these inflationary trends that you see there with impact, the operational cost levels. I mean, it's a challenge and we try to manage it as best we can.

[Thomas Fossard:]

Thank you, Jon.

[Operator:]

The next question comes from James Shuck from Citi. Please go ahead.

[James Shuck:]

Thank you. And hi George. So my two questions. Firstly, just coming back to the ROE for 2022. So I think you have illustrative target of about 15%. I think longer time it's 14% and growing. When that target was given, I think the outlook for P&C is probably improved overall. I think you're talking about overall margin growth and that is allowing for some of the headwinds on the retail that's perhaps a little bit offsetting some of the stuff on the commercial side. So I guess just relative to the initial planning of where we are now, is that 15% starting to look a little bit conservative or other offsetting features to consider. Second question around crop insurance and really it's just trying to understand this business just a little bit better and understand some of the risks in it. So if you were underwriting a premium, I think you mentioned February and then the crops tend to yield later in the year and that affects the earned [Indiscernible] at the premium. But how do we think about the risks when it comes to commodity price increases when you potentially underwritten in February and then taking on the risks of those commodity prices actually increasing quite materially. And how should we think about the risks around low yields and potentially on the first lines due to high costs and adds impact on the yield outcome later in the year. If you're able to give me anything on the earnings premium and expected combined ratio for 2022 that'd be helpful as well. Thank you.

[George Quinn:]

Yes. Thanks James. So in the first one, maybe apart from the financial targets, we could have skipped some of the content back in November 2019 because it hasn't really turned out the way that we would have expected and I think we've invested a lot of strategically to prepare us to [Indiscernible] for things that haven't yet come. So we talked a lower about what we're doing, around retail bank to mean both the strategic commentary on the financial commentary. There was an expectation that we would see that become a much more significant contributor. So the obvious change that we've seen over the course of the last almost two and a half years now, is this things which towards the opportunity that commercial has afforded us. [Indiscernible], 15 been pretty stable farmers, has been pretty stable doing what we expected it to do, but really that trade-off. If you ask me, I mean, as the 15% portray, I don't think so. I think -- I mean, if you think of how we presented last year's numbers, we didn't adjust anything. We told you what the headlines were, we compared that to the goals that we had. So I think we're happy with the progress that we make. I think on ROE improvements, I would expect that -- I mean, further steps really come from what we do around the BIPOC more than than anything else. The price trends are really helpful. But I mean, at some point in the course of the next couple of years, we are going to see a definite environment for commercial. I expect retail to step-up as we discussed earlier, I expect other parts of commercial to help us but in terms of more significant change in our ROE, I think it really has to be capital allocation around the bankrupt. On the crop rest, yes, I mean, it's a -- I mean, it's an instinct business. The -- obviously we were very U.S. focused. It's very US - centric. So it's run in a particular way. The federal government is heavily involved. Most of crop clients will buy essentially what managed to revenue protection. So covering a combination of issues around yields and price. And of course that means that the commodity price side of itself is no -- it's not always the best pointer to the risks that you can face because, of course, yield and price both interact when it comes to revenue and one can push the other at opposite directions. We all see the significant growth in premium is simply a reflection that commodities are priced at a much higher level over the course of last two years, so we charge our prices based on that level. There is risk. The harvest price deviate significantly from the base price that we set February for the key commodities. I mean, that's something that we've priced for and the product. I think the interesting thing, I mean, obviously, we pay a lot of attention to it currently, partly because it's some of the things you point to. So for example, as the --I mean, other potash issues going to be relevant for the use of fertilizer in the U.S.. I mean, the feedback we gave is, if you look at the U.S. farmer source, the materials they need to the growing season, it tends to be quite domestic, either domestic to the U.S. or domestic to North America. There's an expectation, and in fact, an obligation on farmers that they continue to follow prior practices. So we wouldn't expect to see people, especially when the potential peel from a price perspective is so strong, look to try and cut some of the inputs as part of this process. Because if they do, then that potentially raise -- that potentially raises challenges in the settlement process. So I mean, overall, our view on it, combined ratio is the historical indicator, it's pretty much unchanged. The business, we do continue to actively select the risks that we receive to the federal government. And our some of the risks are triggered by commodities other than crawl per se, some of the input commodity topics. It looks as though the U.S. industry at least is somewhat sheltered from these, at least for this year. So other than the much higher price, we don't perceive a particularly different risk in the business.

[James Shuck:]

That's great. Thank you very much, George.

[Operator:]

The next question comes from Dominic O'Mahony from BNP Paribas. Please go ahead.

[Dominic O'Mahony:]

Hello. And thanks for taking our questions. Two, if that's all right, and one is just going back to the back book topic. Clearly, since you thought [Indiscernible] in detail about your ambitions, the interest rate has changed quite low. The macro environment is excluded from quite volatile -- sort to say that your sense of whether any of that changes your appetite a bit to the book that, almost incident addressing whether there might be further opportunities. Anything that's changed in terms of your perspective on how best to approach the back book topic.? And in these second question for the [Indiscernible] so whether you've seen any change in what they're interested in pricing and so on. And then there's one brief second question. Just towards the beginning of the call and the questions, you were saying, if I heard you correctly that, while the retail in these businesses, it's pretty tricky right now, you're actually very optimistic, and actually the median. So I'm just wondering whether that's -- whether there's as a specific reason you expect that whether this is a matter of what goes down, must go up and at some point that business will become more attractive, and then you are ready to participate. Thank you.

[George Quinn:]

Yes. Thanks Dom. So on the bank book, of course on the face of it, the -- you could say the -- hasn't the problem largely gone away. But the -- I think the problem isn't the absolute level of interest rates. The problem is the industry sensitivity. And I think the current environment is actually quite helpful for us to deal with this, but it does need to be dealt with because it's not a good allocation of capital for us because it's relatively poorly rewarded capital given the risk, that is covering. In regards to counter parties, I don't perceive a radical change. I know they see things. So I don't think it alters the level of interest of the supplied capital that's available to help us deal with some of these issues from our perspective. So sure as would be no real change here. We're going to continue to do what we had planned to do. The only thing I would emphasize again is one of these I mentioned earlier. Just please and I know there's a host of optimism out there. Please be careful about adding the old number on top of the current SST number because of course some of that interest rate benefit is in the 234 already. Again, I think that's a positive because that means we have that resource on hand. And we don't need to wait for it to pass through sOme kind of sausage machine before we can do something with it. On retail. I mean, really good question. So simple ain't optimism or do you have it or do you have a theory probably somewhere in between. I think. I mean, obviously, I can see trends in a number of markets. I can see how businesses are behaving. I can see somE of the competitive trends. And I think this [Indiscernible] increasing pressure for people to address the weakness. I mean, if you look at the U.S. markets, that's probably a bit the most clear to me at this stage. Now of course that's not a trAditional retail market but I'm not sure that other markets are going to face very different dynamics in the end. You've seen huge increase and frequency and severity and claims and retail low to in the U.S.. Everyone has to address it to make a reasonable return. And you can see from the activity around rate filing, that's exactly what everyone's doing than in Europe. That process is quite definite because of course, typically you're not failing and you're not in most places, you know, enter tariff market. So it's not as easy to see quite as clearly the inflation may know be quite as pronounced as the us. Better also not normal. And as we discussed earlier if we're running a business that was not SQUES but see it was maybe concentrated in the larger EU markets. And we were seeing a 2% rise, then price. I mean, that's not going to cut it, is it? So somewhere in between, Jon?

[Dominic O'Mahony:]

Thank you.

[Operator:]

The last question for today's call comes from Vinit Malhotra for Mediobanca. Please go ahead.

[Vinit Malhotra:]

Yes. Thank you, George. So one thing is an apology that missed a little bit on the beginnings so I don't know if you addressed some of these but the first one is just on the pricing moderating trend. We've talked about it in the summer of last year, but it's happening now. How much of this do you think is a base effect and how much do you think is something changing in the market in terms of how much compliant there or any other risk demand topics. I'm just curious how much it's based effective this moderation. Second topic is in the life book, the comments about not very favorable business mix, driving down a little bit the human less margin. I'm just trying to square that with what I remember from full-year was a more optimistic view on life. Is it something we should be thinking about or they just a blip in a quarter or something like that? Thank you.

[George Quinn:]

Yeah. Thanks, Vinit. So the -- on the life topic, I mean, that was really a coded way of saying that we had a large single transaction in the same quarter a year ago. And that's slightly distorted the numbers. So I don't think it's particularly directionally relevant for the business, so it's not source of our concern for us. You'll see it naturally move around from quarter-to-quarter. But if you look back in time, Q1, this year, doesn't suffer by comparison to prior Q1s, other than last year, which of course unfortunately is the one we have to compare it to. So if you asking me is it relevant for consideration for the remainder of the year? I don't think so. On the pricing trends, what's driving this base effects, how much can clients bear? I mean, it's a very difficult question to answer. I was talking to Alison Maan who runs our European business. She's has been at a number of client events, recently talking to risk managers, CROs, CFOs, about they perceive things. I mean, there's quite a lot feedback in the system that the extent of rate rise is challenging for clients, particularly given the experience they had prior this, phase of the cycle. I think most of them are going to appreciate. There's clearly an inflationary trend, and in fact, I look at the activity of some of our largest clients who fairly regularly announce price increases for their client base simply because of the impacts that they face. And of course, I mean, we're not insulated from that. And the fact that the increase price and itself drives a bit more risk into the insurance relationship. Interestingly, the clients also complained about the lack of capacity. So there's a feeling that across the industry risk appetite is still not growing, which I guess also has some impact on pricing trend and potentially again, helps sustain it for longer than we may have expected otherwise. Having said that these clients -- these client relationships are extremely important to us. We do try and differentiate within our portfolio for our clients who are very active around risk management and can demonstrate from the demonstrated outcomes that provides significant risk mitigation, you'll have a different outcome. I think already for I think at least a year, For clients that had that different experience, if they've had a different outcome of pricing already, the pricing trend might look like the one we saw towards the end of last year, but I think it continues to be much more differentiated. So if you're perceived to be a poor risk, you're going to have a problem. I think if you're a good risk, that might still not be precisely what you want, but we believe we'll be able to reflect the risk that you bring. So pricing trend, actually, we would be slightly optimistic. Given the comments I made earlier, we're seeing the current trends sustain that for a bit longer. But we are aware of making sure that we try and support our clients the best way that we can.

[Vinit Malhotra:]

Thank you. Appreciate the viewpoint. Thank you.

[Operator:]

Ladies and gentlemen. That was the last question I would now like to turn the conference back over to Jon Hocking for any closing remarks.

[Jon Hocking:]

Thank you very much everybody for dialing in. We are a where there's a few questions left standing. Our team will be available shortly to answer them. Over that, thank you for your time and good afternoon.

[Operator:]

Ladies and gentlemen, the conference is now over. Thank you for choosing [Indiscernible] and thank you for participating in the conference. You may now disconnect your lines. Goodbye.