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Edited Transcript of SREN.VX earnings conference call or presentation 31-Oct-19 1:00pm GMT

Q3 2019 Swiss Re AG Earnings Call

Zurich Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Swiss Re AG earnings conference call or presentation Thursday, October 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Robert Dacey

Swiss Re AG - Group CFO

* Philippe Brahin

Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability

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Conference Call Participants

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* Andrew James Ritchie

Autonomous Research LLP - Partner, Insurance

* Edward Morris

JP Morgan Chase & Co, Research Division - Equity Analyst

* Emanuele Musio

Morgan Stanley, Research Division - Equity Analyst

* Farooq Hanif

Crédit Suisse AG, Research Division - Head of Insurance Research in Europe

* Ivan Bokhmat

Barclays Bank PLC, Research Division - CEEMEA Banks Analyst

* James Austin Shuck

Citigroup Inc, Research Division - Director

* Jonathan Peter Phillip Urwin

UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst

* Kamran Hossain

RBC Capital Markets, Research Division - Analyst

* Michael Hermann Haid

Commerzbank AG, Research Division - Team Head of Financials

* Sami Taipalus

Goldman Sachs Group Inc., Research Division - Research Analyst

* Simon Fossmeier

* Thomas Fossard

HSBC, Research Division - Co-Head of European Insurance and Analyst

* Vinit Malhotra

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning or good afternoon. Welcome to Swiss Re's Nine Months 2019 Results Conference Call. Please note that today's conference call is being recorded.

At this time, I would like to turn the conference over to John Dacey, Group CFO. Please go ahead.

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John Robert Dacey, Swiss Re AG - Group CFO [2]

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Thank you very much, and good morning or good afternoon to everyone from me as well. I'm here with Philippe Brahin, our Head of Investor Relations, to talk you through the Nine Month 2019 results.

Before we go to Q&A, allow me to make a few quick remarks on the release we put out this morning.

The Group reported a 23% increase in net income to $1.3 billion for the first 9 months of 2019 in spite of the elevated level of large claims from both natural catastrophes and man-made events. This result reflects the strength of our Reinsurance franchise, as well as excellent investment results, with a return on investments of 4.3% for the 9 months.

The Group's capital position remains very strong with an SST ratio of 241% at 1 July 2019, in excess of our 220% target level and reflecting both the capital deployed towards the attractive business opportunities and the impact of financial market movements.

Briefly going through the business segments, P&C underwriting performance remained strong in spite of the large claims from cats in the current year, including Typhoon Faxai and Hurricane Dorian. On a normalized basis, P&C Re continues to be on track to achieve a combined ratio of 98% in 2019.

Life and Health Re continues to deliver strong results with an ROE of 11.8% for the first 9 months at the upper end of the target range.

Corporate Solutions results reflects the impact of management actions already announced in July to initiate a turnaround in the business unit's performance.

Once again, in Life Capital the gross cash generation was bolstered by exceptional items in spite of the impact of falling interest rates and continued investments in the expansion of the open book businesses.

We look forward to providing business and strategy updates for the Group and the business units at the upcoming Investor Day on the 25th of November in London, and we hope to welcome many of you there.

With that, I will hand over to Philippe to introduce the Q&A session.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [3]

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Thank you, John. Thanks. And good day to all of you also from my side. So as usual, before we start with Q&A session, I would like to remind you to please restrict yourselves to 2 questions each and register again if you have follow-up questions. Operator, with that, could we please have the first question?

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Questions and Answers

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Operator [1]

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The first question is from the line of Kamran Hossain from Royal Bank of Canada.

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Kamran Hossain, RBC Capital Markets, Research Division - Analyst [2]

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First one is just on buybacks and dividends. Not the one you talked about in your press release today, but in terms of what anything you might announce at the end of this year. I guess you've had an uncovered dividend plus buyback for -- into the third year in a row now, if you do it for 2019. How should we think about any potential buyback being announced at the end of this year kind of in terms of capacity and also kind of willingness to have an uncovered buyback again this year? And the second question is just on Japan. You used $7 billion for Faxai. How comfortable are you that this is really conservative? I think one of your -- a smaller specialist player said you used $10 billion yesterday. So how should we think about this? And is 7 kind of top-bottom or bottom-up in the way of thinking about it? Thank you.

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John Robert Dacey, Swiss Re AG - Group CFO [3]

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So to your first question, buybacks and dividends, I think it's worth noting that when we increased the size of the 2019 dividend up to CHF 5.6 per share, we did that cognizant of what we've said multiple times on our capital management strategy that once we're assured that the business is properly capitalized, it's our objective to at least maintain if not increase the ordinary dividend on a regular basis. And so I think you should feel absolute security about the dividend.

With respect to a buyback in 2020, I can simply suggest that the second tranche of the 2019 dividend, which would have been the second billion, is thought of differently both by management and by the board of directors than the ordinary, or what had become ordinary, CHF 1 billion dividend in recent years. Which is not to promise anything for 2020 but to simply say you should not read across that the extraordinary dividend, which the second tranche would have been linked to exclusively the successful IPO or otherwise move on the ReAssure book and what might have been a benign nat cat season, should not be used as evidence for a change of orientation towards the buybacks generally.

With respect to Japan, you're exactly right. We did bring an expectation of industry loss of $7 billion to the market this morning. This is a bottom-up calculation. We've been in close contact with our core Japanese clients on the Faxai losses. We've gone through actually multiple reserving committees on this specific topic. And we're comfortable with the facts that we have in front of us that this is a good estimate of what the typhoon will cost the industry and obviously what it costs us. I'd say in light of the creep that we saw in last year's typhoons, and Jebi in particular, I could imagine that some of the people in the industry may be putting additional buffers anticipating bad news. We don't have a fact base to put those on our estimates at this point of time, and so we remain comfortable with the $7 billion industry loss.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [4]

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All right. Thanks, Kamran, for your questions. Can we have the next question, please?

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Operator [5]

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The next question comes from the line of Sami Taipalus from Goldman Sachs.

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Sami Taipalus, Goldman Sachs Group Inc., Research Division - Research Analyst [6]

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So the first question's just on the U.S. [cash offer] trends. Could you just elaborate a little bit more in detail on what you're seeing on your own reserves there? And it just seems like the loss environment there has deteriorated quite a bit for 2019. So it'd just be great to get an update on what you're seeing on your own business at the moment and whether you got any incremental level of concern there.

Then the second question I have is just on CorSo and the rate momentum in CorSo. And at the half year, you gave some quite -- an indication of very strong rate increases towards the back end of the first half. What are you seeing in terms of momentum during the third quarter there? I know you're flagging an uptick in overall rate momentum in the 9 months versus the first half, but how's the momentum in Q3 compared towards maybe Q2? Thank you.

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John Robert Dacey, Swiss Re AG - Group CFO [7]

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Look, on the U.S. liabilities, obviously the -- there's a series of reasons that for which we have been concerned for quarters, if not years. I think we are constantly updating not only our costing parameters for writing reinsurance in this business, but also the appropriate levels of the reserves that we have out there.

A couple observations. One, the U.S. is about 45% of our total liability reserves at the Group. Within that, I'd say the developments that we've paid a lot of attention to are the recent increase in large jury awards and settlements for injuries, the increase of suits by, in the U.S. by the individual state attorney generals. New latent claims, whether they be talc or others that sometimes are coming across in these awards. Sometimes they're simply being developed in future lawsuits. The mass violent terrorism acts and large scale criminal activities, these are all -- and lastly the one probably out in front of many people's minds, the opioid crisis and liability related to that.

These are all issues which our team spends an enormous time evaluating and making sure that the exposures that we have on our books today and the reserves we have up with respect to specific claims and the IBNRs reflect this latest information. It is updated on a quarterly basis, and I think we feel comfortable that we are prudently reserved for development. So that's not to say that things couldn't go worse than expected in some cases, but we don't see a particular concern. I think we've mentioned already that for the quarter, the prior year development on our reserves for Reinsurance is positive. That includes a modest negative on the casualty side and a stronger positive on property, but all within any sort of reasonable expectations of volatility. Nothing dramatic in any case.

With respect to the rate increases, we've seen a continued strong but not accelerating move on the prices for the business which CorSo is writing. And we've listed 10% at 10 months. I think most of our monthly numbers in the third quarter have been right around there. Maybe 1 or 2 points up. That seems to be a continuation of the first 6 months; not an acceleration, I'd say.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [8]

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Thanks, Sami, for your questions. Can we have the next question, please?

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Operator [9]

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The next question is from the line of Farooq Hanif from Credit Suisse.

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Farooq Hanif, Crédit Suisse AG, Research Division - Head of Insurance Research in Europe [10]

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Just going back to buybacks and your regular buyback, we're getting closer and closer to the 220% level. Can you explain -- can you sort of characterize what the 220% means in SST terms when it comes to your regular buyback? So how far below are you prepared to dip? At what point does growth become something that you prioritize? Because clearly the 241% that we have at the half year is potentially lower given interest rate movements to date. So just wondered, as we get closer to that, how important is that number when we consider the regular buyback?

And then second in CorSo, can you talk about underlying volume growth? So I think the fact that you're pruning roughly a third of your book and then growing elsewhere, if we looked at the sort of volume X, the pricing impact, are you kind of hoping to sort of bring that down or flatten it? And assuming that you've sort of started this process this year, what will we see in the sort of coming quarters on that net growth? Thank you.

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John Robert Dacey, Swiss Re AG - Group CFO [11]

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I'll do my best here. With respect to the SST, 220% is a target. It's not a limit. And to be very clear, I think we believe that we can fluctuate around that number. If we drop all the way down to 200%, that would require a different approach where the objective would be to engage in some actions to build back the capital position. But if we're 219%, it doesn't set off any particular alarms either inside the group or importantly vis-a-vis FINMA, our regulator.

What I would say is, yes, the SST ratio did move down 10 points. There were a number of items in the first 6 months. The capital deployment itself that we did from the growth of the business probably absorbed about 20 points of the SST ratio. But the economic earnings, which again don't necessarily track our U.S. GAAP earnings, delivered a positive of about 15 points coming the other direction. There are other bits and pieces through that, including FX and interest rates in the first 6 months, which was also negative, to bring us down to the 241%. That 241%, as you rightly point out, does not include interest rate movements in the third quarter, but again, there are some positives not to be overlooked, including a debt issuance that -- the subordinated debt in September of another $1 billion, which is SST as well as S&P eligible. So I think it's premature for me to forecast where the year end will be. I think we will evaluate the capital position when we get there, discuss it with our board and come to the market at the end of February with some clear indications of what to expect.

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Farooq Hanif, Crédit Suisse AG, Research Division - Head of Insurance Research in Europe [12]

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And then, John, on the CorSo pruning.

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John Robert Dacey, Swiss Re AG - Group CFO [13]

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So on CorSo pruning, we identified a series of portfolios which we're going to shrink materially. The one that we started on before the announcement at the end of July was the U.S. excess and surplus casualty book. Most of the others, the teams were informed thereafter the public announcements dealing with brokers, in some cases MGAs, to get this started. So most of the pruning's impact will only come through in 2020. That's one of the reasons why we put out the forecast and combined ratio of 98% for 2021. It's going to take a number of quarters for this to earn through. Some rough numbers for you to work with. About a quarter, you might suggest 25% of the pruning will be actually in, taking effect in 2019. Another 65% through 2020. So by the end of 2020, 90% of the pruning should be done. There'll be some residual business, including some multiyear contracts which will still be around at the beginning of 2021, but by far, most of it will be done.

One of the things that we mentioned in July was, well, a third of the book really needs major work. Two thirds of the book is performing well. And we've got a series of businesses in CorSo, not just in the U.S. but other places as well, where in property and credit and surety in some of the FinPro lines, we're very comfortable writing new business, especially as we're getting these price increases in the business we write. And so my best guess today after 9 months is that we will end the year with CorSo showing a bit of an increase in premiums year on year thanks to the price increases for the book that does reprice in the second half of this year. And as the pruning takes a bigger impact in 2021, we'll have to see where premiums go for the year. But we expect in February to be able to give you a little more insight of the future not only of volumes of CorSo in 2020, but also an expected combined ratio like we've done for Reinsurance when we bring both those out.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [14]

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Thanks, Farooq, for your questions. Can we have the next question, please?

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Operator [15]

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The next question is from the line of Andrew Ritchie from Autonomous.

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Andrew James Ritchie, Autonomous Research LLP - Partner, Insurance [16]

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Just thinking about potential capital deployment in 2020. I appreciate you have a strong capital base, but from a sort of volatility perspective and risk budget and annual cat loss budget perspective, do you still have room to grow in nat cat? I'm guessing in certain regions, particularly Japan probably not, but maybe just characterize where the room is to grow in nat cat given it appears to be pricing's likely to rise again in that area and there's increased demand. Again, I'm not thinking from your SST capital position. I'm thinking more from a volatility and your toleration of volatility.

Second question, a clarification. John, I think you said the economic earnings were 15 points on the SST movement. That seems like a very strong number. Is that an operating number? Does that include some variances in there? Or is it just a very lumpy number because it's capturing the kind of 1/1 renewal block? Is there anything unusual about a number of those if we annualize that number? Even if we don't annualize it, it looks very, very strong relative to recent years, economic capital generation. Thanks.

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John Robert Dacey, Swiss Re AG - Group CFO [17]

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Let me do the second one first. Remember that this is a 6 months for the economic capital, so the nat cats that we've seen here in Q3 were not part of those losses. I'd day both on the P&C's book, partly because of the new business that was brought on, but also in Life and Health we saw positive movements, but the investment result in the first 6 months of the year was a very strong economic earner for us. And we'll see how that plays out for the full year, but again, that was a material piece of the puzzle there.

I think with respect to nat cats, you're right that there will be some peak risks which are increasingly an issue for us. It turns out that even as successful as we are of working with our Japanese clients, that's probably not one of them that's a large risk for us, and we're very important to the Japanese market. But while we do do some retro that includes the Japanese portfolio, I'd say the biggest peak risk clearly remains our North America wind storm exposures. There we've in 2019 close to doubled the retrocession of the shortfall exposure through our sidecar sector re. And we believe that we have the ability to continue to work closely with an investor community to be able to manage off our balance sheet some of the risk while maintaining by far the vast majority of that risk as we go forward. But yes, the enhanced use of specific retrocessions on some of these peak risks will allow us to continue to write profitable business and manage the economics on a going forward basis.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [18]

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Thanks, Andrew, for your questions. Can we have the next question, please?

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Operator [19]

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The next question is from the line of Ivan Bokhmat from Barclays.

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Ivan Bokhmat, Barclays Bank PLC, Research Division - CEEMEA Banks Analyst [20]

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I've got questions on P&C Re, please. The first one would be on growth. Could you talk about what gross premium growth you've had so far in 9 months, and perhaps where could we expect that to go in 2020, and particularly in the context of the increased volumes in the first half and the increased volumes in nat cats. And the second one that's connected to it, should we then expect the underlying combined ratio in P&C to be lower than 98% in 2020 given probably a lower rate in -- lower combined ratio in nat cat operations? Or put another way, what could prevent us from seeing this improvement in 2020? Thanks.

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John Robert Dacey, Swiss Re AG - Group CFO [21]

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We've not released gross premium written numbers on the quarters, so I apologize for frustrating you there. I do think, just to reiterate, 17% increase in premiums earned. And I think the written you should expect would be coherent with that as we move forward. I think in 2020 we'll evaluate the pricing environment in various markets to judge our own ability, but our expectation is we should be able to continue our growth. Maybe not as strong as we saw in 2019 or maybe stronger. It really depends on the client's reaction to what is a third year of a significant set of catastrophe losses and the more challenging view, at least in the U.S., on the casualty side of the business.

I think our expectation on the normalized combined ratio will have to wait until February when we see the portfolio. You asked what could change it. I think one of the things that was an adjustment, if you remember the beginning of this year, we acknowledged a large transaction with AmTrust on a casualty portfolio, which again has worked out just fine for us. Year to date, with the performance as expected, this tends to be shorter tail casualty, but it would be a different expected combined ratio than a nat cat portfolio. So, without making any predictions of whether we're going to do more like that or not, the mix of business matters and that's why we wait until February to provide you with the estimate of our expectation.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [22]

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All right. Thanks, Ivan, for your questions. Can we have the next question, please?

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Operator [23]

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The next question is from the line of Edward Morris from JP Morgan.

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Edward Morris, JP Morgan Chase & Co, Research Division - Equity Analyst [24]

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First one, and I appreciate it may be a little early to give us a concrete view on this, but I wonder if you could just talk a little bit about the nature of the Hagibis loss in Q4, how you think it relates to Faxai and the experience of Jebi, for example. And is there anything in the nature of the loss that might cause market shares and industry losses, et cetera, to be different? The reason why I'm thinking about this is because I'm conscious that you allocate a much smaller cat budget to Q4. So I just wondered if you could give a view on how you're looking today relative to your cat budget for Q4.

And the second question relates to U.S. casualty again. Wonder if you can just talk a little bit about what pricing trends you're seeing there. Obviously we've seen this what appears to be more adverse claims trends. But just on the business that your cedents are writing, do you think the price improvements that they're getting suggest that profitability on new business is getting better? And where is it, in your view, relative to where it needs to be to be adequate? Thank you.

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John Robert Dacey, Swiss Re AG - Group CFO [25]

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So on Hagibis, obviously a Q4 event for the industry and for us. You don't see anything whatsoever in the 9 month numbers. The nature of the losses is going to be somewhat different to recent typhoons in the sense that there appears not to have been that much wind damage in comparison to the amount of flooding that created major losses. And one of the implications of that is it's probably going to take longer for us to sort out what those losses actually are as the damage caused by the floods tends to require more investigation and also a little more challenging view on actual liabilities. So that's the first thing.

In terms of relative size, the initial indications that we're getting out of our clients in Japan is this will be a bigger event than Faxai has been, but it may not -- or at least to date we've not received evidence this will match Jebi in its actual losses. Again, highly preliminary and very much subject to change. I would like to say that we'd be able to give you better insights when we do our investor day in November, but the reality is I'd expect this may not be clear to us at least until the beginning of next year.

With respect to U.S. casualty, there is unambiguously increased pricing. I think it's hitting different sectors differently. The one exception to that rule probably is the U.S. worker's comp where prices are not going up, but where the actual results I think for most carriers has been okay. We saw commercial auto moves over the last probably 8 quarters move up and bring that segment to what appeared to be okay pricing. I think the broader liability books remain in need of continued price increases, systematic across the board. I don't think it matters too much. It's worse in the large corporate segments and the excess lines than other places. But our view is across the board, the trends in claims inflation for whatever reason will require continued price increases, and we're supportive of our primary companies trying to go chase those down.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [26]

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All right. Thank you, Ed, for your questions. Can we have the next question, please?

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Operator [27]

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The next question is from the line of Emanuele Musio from Morgan Stanley.

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Emanuele Musio, Morgan Stanley, Research Division - Equity Analyst [28]

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I have two questions on Corporate Solution. The first question is on the combined ratio this quarter, and I wanted to know if it reflects any research dampening, and if you actually could give us any indication, please. And finally, still on Corporate Solution, I wanted to know if you're still comfortable with your objectives, or maybe in light of most recent loss trends, including but not limited to casualty, you feel that it might be harder for you to address some of the issues in the divisions? Thanks.

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John Robert Dacey, Swiss Re AG - Group CFO [29]

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Let me go after the second. First, we remain confident that the target we put out for 2021 of a 98% combined ratio is entirely within CorSo's reach. Those underlying trends in casualty in particular I think we've identified and were part of the decisions for both reserving actions and the portfolio restructuring that we announced at the end of July. So there's frankly been no real new surprises here. I think a continuation of negative activity coming through the industry in terms of ultimate claims cost is something that we've tried to address in the first half of 2019.

With respect to the combined ratio, the actual prior year development for CorSo in the third quarter was flat. There were some claims that were coming into CorSo's underwritten book which ultimately moved through with the adverse development cover that we put in place to Reinsurance. That's why we put the ADC in place. If you remember, CorSo itself keeps skin in the game by holding onto 20% of those risks, but the overall positioning I think is completely manageable. And for Reinsurance, this is part of their -- the calculation we do to reiterate that the 98% combined ratio is an achievable target for their performance on a normalized basis in 2019.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [30]

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All right. Thanks, Emanuele, for your questions. Can we have the next question, please?

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Operator [31]

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The next question is from James Shuck from Citi.

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James Austin Shuck, Citigroup Inc, Research Division - Director [32]

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Two questions from me, please. John, just returning to the reconciliation as the SST ratio over the period, I think you mentioned that those 20 points from capital deployment. That's about a 4 billion to 5 billion number. When you gave the SST at the beginning of last year, I think you set aside 1 billion for growth. And then you actually executed on another 1, so that was an extra 2 for the SST. So on that 4 billion to 5 billion, can you shed any insight, please, where that's coming from? You mentioned some [grace] in nat cat, but it seems to be funded pretty heavily with retro. So I imagine the actual incremental capital requirement is fairly limited on that side. So is it casualty? Where's that actually coming from, please? That's my first question.

Secondly, again around casualty. I'd like to just focus specifically on Q3 and in terms of the loss cost trends that you've experience in that period. Obviously when you took the reserve additions at CorSo at H1 or earlier, you were kind of taking into account the trends that you'd seen at that time. There seems to be a market-wide deterioration since then. So my question is really what is the impact -- will there be any impact from that deterioration in Q3 at CorSo? And then when we think about PC Re itself on a standalone basis, in the past you've been pretty adamant that you wouldn't see any bleeding through of CorSo type issues into PC Re, but the deteroriation we've seen is coming largely from casualty excess of loss. So I'd like to get some insight into how excess of loss versus proportional is trending in Q3. And again, sort of against the context of some of [ED's] comments in the past that have been that the additions on casualty that we've seen over multiple years will be coming to an end and that you're very comfortable with the level of reserving in that unit. Thank you.

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John Robert Dacey, Swiss Re AG - Group CFO [33]

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So let me start with the SST deployment. I think it's important to understand the SST is not just for our P&C businesses, but also Life and Health. We continue, in spite of what appears to be flat growth, although the Life and Health book is actually up about 6% on a like-for-like basis when you take out some internal retrocessions and adjust for foreign exchange. In that space, there has been capital utilized for some of the morbidity/mortality risks, critical illness portfolios in particular. On P&C, yes, it's been across the board. I mentioned the AmTrust position. The 1/1 renewals were in the 251 calculation. But we subsequently continued to find opportunities to renew and build out the businesses with the April and July renewals. So I'm comfortable that this is across the board deployments of the capital positions.

With respect to casualty, we have a Group underwriting team. The good news is Eddie Schmid, the head -- that team will be with us in November and maybe provide a little bit of the detail that you're looking for here, James. I think we looked hard in July of was there anything we were seeing in the CorSo book that mattered to the reserve positions that we had in P&C Re and remain comfortable there. As I mentioned, we have had claims come through. There's I think nothing that's dramatically different than what we've seen, although I simply reiterate the negative orientation towards the sort of casualty as a line of business continues. We think our reserves are in fine shape for what we see in the various sublines and the issues that I mentioned earlier on the call. So, we're not going to throw kitchen sink at this position. We're comfortable with the reserving in P&C Re, and we'll continue to monitor anything that's a true new development and/or would have us change our views of the reserving adequacy that we currently have.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [34]

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All right. Thank you, James, for your questions. Can we have the next question, please?

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Operator [35]

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The next question from the phone is from Simon Fossmeier from Vontobel.

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Simon Fossmeier, [36]

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Two questions. One is on the return on investment. You said that your running yield remains at a pretty healthy 2.9%. And I was just wondering if this means increased risk taking in your investments. The second question, I'm not sure you're going to disclose this, but I'm going to ask anyways. Would you talk about the impact of the casualty insurance arrangements on the combined ratio in P&C Re? Thank you.

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John Robert Dacey, Swiss Re AG - Group CFO [37]

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So on your first one, 2.9% was maintained as of 9 months. I can suggest that this is unlikely to be maintained for the whole year as the reinvestment rates are obviously below that in almost every market. And so you should see a minor move down of 10 basis points would be a reasonable approach for that. So it's not that we've been ramping up the risk to maintain this. We make our investments based on the strategic asset allocation that we think is appropriate. And if rates go down, we're going to have to find ways to either push the prices on the business up further or otherwise manage the economics of the individual lines of business.

For your second question, I think -- we put the ADC in place to manage the volatility that might or might not come through Corporate Solutions. It's working exactly as advertised. And again, those losses, to the degree they've been absorbed in P&C Re, are now in the calculation of a normalized combined ratio, and we're still on track for 98%. So I think it's safe to assume that to date it's not been material.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [38]

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Thanks, Simon, for your questions. Can we have the next question, please?

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Operator [39]

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The next question is from Vinit Malhotra from Mediobanca.

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Vinit Malhotra, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [40]

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So two questions, please. One is on the California fires that we see. I picked up a comment in the 1H call which was that there was some more conservative modeling involved as the renewals grew. I'm just trying to cross check. Because California fires have been the topic of modeling area for a couple of years now, or at least a year now, should that make us a bit more comfortable about potential losses on these fires for yourself and CorSo? Or should we just assume that you look at the recent history and model out those fire losses for yourself? So first question.

Second question is on the Life and Health Re outlook. So there was a bit of a motion back in December or full-year reserves about how high -- how do we -- consensus was was 10% to 12%. And then we saw a very high number in 1Q, but then 2Q and 3Q both look a tad bit lower than this 10% floor. Are there reasons to think that the best days of Life and Health Re are behind us, or how would you characterize? Should this 10% to 12% still be, we should be thinking of the midpoint, the lower end? Just a bit of context. Thank you very much.

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John Robert Dacey, Swiss Re AG - Group CFO [41]

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Vinit, I think it's premature to look at 2 quarters and suggest that this is the end to the Life and Health franchise. This business continues to chug along. As I say, there's some underlying growth here which is not necessarily obvious. But more important, I think when you look at our economic value reporting over the last years, you'll see that this is a business which continues to serve us well, and ultimately the earnings will come through U.S. GAAP. We cautioned you that there's enough things going on in the book which would lead us to continue to stick with this 10% to 12% ROE target. It's 200 basis points. I don't think we really need to be more specific about whether we're in the bottom quartile or the upper quartile of the target at the moment. We're at 11.8%. And you're exactly right; if you do the reverse engineering, you'll see that on Q3 we were at 9.5%. But the nature of this business is clearly long term that there might be some fluctuations on a quarter, but we continue to provide the guidance of a 10% to 12% ROE range.

There will be some changes in accounting rules both in U.S. GAAP and in IFRS over the coming years which might have some impact on an ROE calculation because it might have more impact actually on the equity supporting life businesses. But you've got some time to get ready for that.

On the California fires, I'd simply observe that the fires are not contained. It's way too early to estimate what industry losses might be there as a result of what are now 3 distinct fires: the Getty, Kincade and I forget the name of the third. We had significant losses coming through in the last 2 years as a result of property covers, and in some cases some liability covers written with, among others, the California utilities. We've reevaluated those as we wrote our 2019 business both in CorSo and in Reinsurance. And I'm sure when we get together in February, we'll be able to give you an indication of where our losses might be. But at this point in time, I think there's very little we can say other than we're sorry for the people that are affected.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [42]

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Thanks, Vinit, for your questions. Can we have the next question, please?

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Operator [43]

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The next question is from the line of Jon Urwin from UBS.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [44]

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Going to go back to U.S. casualty. I'm sorry for that, but there's so much debate around the market at the moment after all of these updates in the U.S. carriers. So I think any detail you can give us would be much appreciated. Could you give us an indication of where you are reserved in the best estimate range for that U.S. liability? Part of the reserves, I think you said it was 45% of the reserves. Where is claims inflation running versus reserving assumptions? I guess it looks like the U.S. carriers are just doing what you'd expect them to do at this point, tapering reserve releases, adding selectively and increasing loss pick. So are you guys doing the same?

Secondly, on opioids, and again, I appreciate it's early stages here and it's too early to talk about potential numbers regarding settlements, but what part of your book would exposed by this? I guess it's just the general liability, product liability, management liability kind of lines to pharma. Any color there would be great. And what kind of line sizes do you typically write? Thank you.

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John Robert Dacey, Swiss Re AG - Group CFO [45]

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On a limited disclosure, I'm probably not going to satisfy your desire. And so I'm going to ask you probably to come back and spend some time with Eddie at the investor day. But to give you a sense, and to clarify what I might have said before, the U.S. casualty is 45% of total casualty written by the group. So that's a premium number; not a reserve number. Within that, actually a very small amount is directly exposed to large corporate risks of less than 5%. Accident and health is almost 30% of that business. Liability unrelated to large corporate is a little more than a third. Motor about 15% and financial lines probably at 20%. And when you add those together, you get close to 100%, or you should get close to 100%. So that's the U.S. portfolio.

I think we've -- the real, I have to be careful of the words. I don't want to say catastrophic because it's probably an overstatement. But the major problems on jury awards seem to be related to large corporates and what are perceived to be very, very deep pockets. We do have limited exposure there, but it's not non-zero. And the nature of what we've written probably provides us some exposure along the line that are being affected. That's why we look to continually evaluate our reserves, and our reserves in these lines like the rest of the book we believe are in the sort of 60% to 80% range of best estimate. And we're not going light here and heavy other places to the best of our knowledge.

I think, as I mentioned in the quarter, there were some modest additions in the casualty and specialty lines, some larger releases in property, but prior year for the quarter was positive. And for the full year, prior year is positive once you take out the late reported claims on Jebi. That was a big Q1 number. So, we're not seeing any massive trend that affects our book specifically. We've mentioned that we think pricing in U.S. liability needs to continue to strengthen for current and anticipated future claims inflation.

On opioids specifically, what I can say is the Group and P&C Re, as well as CorSo, a number of years ago decided the covers for pharmaceutical companies were problematic for many different reasons. Not specific to opioids, but also including that. If you go back to oxycodone, there were some important claims activities already back in 2005. So this is not the first time that you've seen issues around both these drugs and broader issues on pharmaceuticals. I'd say as a result of that, we've reduced our normal exposures. I think one of the challenges in trying to understand the scope of opioid liability is exactly the -- where in the value chain people are going to come after, and to what degree this is about trying to punish people that are viewed to be having behaved badly versus getting economic compensation. And so it needs to work itself out. I think, again, with the exposures we have we believe we are correctly reserved as of today.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [46]

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Thank you, Jonny, for your questions. Can we have the next question, please?

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Operator [47]

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The next question is from the line of Michael Haid from Commerzbank.

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Michael Hermann Haid, Commerzbank AG, Research Division - Team Head of Financials [48]

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Just one question, but maybe it's a complex of questions regarding pricing of nat cat and the 2020 renewals. You obviously increased your exposure to nat cat risks in the 2019 renewals. Do you feel that the current pricing of property nat cat adequately reflects the higher risk which also comes from climate change? And with respect to Asia, do you think given that we have seen a number of large nat cat there that the current pricing is sufficient, or should we expect much more price increases in the 2020 renewals?

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John Robert Dacey, Swiss Re AG - Group CFO [49]

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A couple thoughts. One is we are constantly evaluating our models based on actual experience not just with our own losses, but the industry losses. What I would say is some of the apparent effects of climate change with respect to fires, the ones in California, but not only. Drought conditions, average temperatures, reduction in moisture in potentially vulnerable areas are things which we continue to review in the modeling team. I think in the same way in Asia, not just the frequency and wind intensity of typhoons, but especially the amount of rain associated with them in recent years and the resulting cost of flooding are also major places where our modeling team routinely looks to update.

What I can say is in Japan specifically, we would expect some major increases in the expected costs of storms and therefore required significant increase in pricing for property covers that include flooding. So that will be a material issue for the 2020 renewals. I think people quickly forget while Dorian ended up not being a big event, we've got the industry loss at $4.5 billion. It was an extraordinarily powerful storm, and 3 days before, it obliterated 2 islands in the Bahamas. It looked like it was heading straight on to Florida, East Coast, and the amount of damage would have been much, much greater. So I expect that anyone that's been dabbling in Florida exposure will reevaluate where the pricing adequacy is for those risks as well. We will see where prices have been. In 2019, you're correct. An example, we move from a massive underweight in the Florida exposure to what I believe is still an underweight position, but we did see price increases that reflected better the underlying risk. We'll continue to evaluate on a geography basis the pricing for 2020.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [50]

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Thanks, Michael. Thanks for your question. Can we have the next question, please?

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Operator [51]

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The next question is from Vikram Gandhi from Societe Generale.

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Sami Taipalus, Goldman Sachs Group Inc., Research Division - Research Analyst [52]

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Two quick ones from my side. Can you shed some light on which specific lines did you have to strengthen results on casualty in P&C Re? Is this especially environmental related or general liability or commercial, auto or something else? And secondly, just a clarification. The 10% improvement in price quality for CorSo, that is risk adjusted or just nominal? And I have a couple more, but I guess I'll go back in the queue.

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John Robert Dacey, Swiss Re AG - Group CFO [53]

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The 10% increase was the effective rate increase on a risk-adjusted basis for the business which was brought onto the books. So the -- in places where we've decided to exit, while there might be important price increases, that wouldn't be reflected in the first case. In the second case, I don't think there was that much on the property side, on the maturity side, which is 2 big books that have and continue to be important part of CorSo's future that you would have seen much risk adjustments in the pricing. And I apologize --

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [54]

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Questions on the reserves on the casualty side, if we have a breakdown or some light on lines of business.

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John Robert Dacey, Swiss Re AG - Group CFO [55]

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Look, every quarter we literally go through the whole book. And as I said, while there were some modest negatives in P&C Res, when you look in the context of the overall reserve positions, there was nothing dramatic in any specific line.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [56]

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All right. Thank you very much, Vikram, for your questions. Can we have the next question, please?

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Operator [57]

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The next question is from Thomas Fossard from HSBC.

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Thomas Fossard, HSBC, Research Division - Co-Head of European Insurance and Analyst [58]

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Just one question remaining on the gross cash generation of Life Capital in Q3. So looking at the numbers, seems to be that gross cash generation has been [370] million. Looks to be very much ahead of the normal quarterly numbers that we should expect or ahead of what ReAssure was expected to produce. So wanted to get a bit more understanding of what seems to drive this in Q3 (inaudible). Thank you.

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John Robert Dacey, Swiss Re AG - Group CFO [59]

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I cannot on the year to date. There are 2 big positives that are driving this number that the second one relevant for Q3 and then some other things which are counterbalancing it a little bit. So this is again the number for Life Capital. We mentioned early on that one source of cash was a 10% stake when MS&AD upped from 15% to 25% ownership of ReAssure. A second is there was a series of debt tranches which we had from ReAssure related to the IPO positioning that were ultimately placed in the market in the third quarter. Some of those were used to replace some revolving facilities with banks. Some was just cash that came up in the door. One of the good news from the Group's point of view, from my point of view as Group CFO, is it allowed Life Capital to recently pay a cash dividend up to us of $500 million. $505 million to be precise. So those are items which were positive, the debt placements also in the third quarter. I think interest rate movements and continued growth in the open books of Life Capital would have utilized cash in this calculation. But we'll provide on a going forward basis an indication of where we think ReAssure's cash generation capabilities are in the next years, and you should expect that will be coherent with what we had in the IPO perspectives for ReAssure.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [60]

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Thanks, Thomas, for your question. Can we have the next question, please?

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Operator [61]

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The next question is a follow up from Vikram Gandhi.

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Sami Taipalus, Goldman Sachs Group Inc., Research Division - Research Analyst [62]

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Just if you can shed some light on how the Group's thinking has developed on ReAssure. What's the latest thinking for the IPO or eventually a strategic sale to a third party? And then on the $505 million upstream from Life Capital that you just mentioned, is that a third quarter event, or that's come through in October?

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John Robert Dacey, Swiss Re AG - Group CFO [63]

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So on the first one on ReAssure, what we told you at the end of the summer was we did not expect to restart the process for an IPO in 2019, and that remains the case. I think we continue to evaluate what options might be out there for us to achieve our objective, which is related to the fact that we think this is a good business, but we think we're not a great owner for the majority of the business. And so over the next quarters, we will continue to pursue avenues that will put us in a position to no longer be the majority owner of it. Exactly which one of those options might be best and most actionable I'd say is to be seen. But a lot of the heavy lifting for an IPO was already done in the run up to the window that we saw last -- this past summer, and so for us to restart that with a fresh set of numbers I think would be entirely feasible. We've speculated in the past, or you speculated in the past about other options. And we've always said that we'll do what we think is in the interest of the stakeholders and shareholders in terms of finding a good value for what we think is a strong asset.

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Philippe Brahin, Swiss Re AG - Head IR and Head Governmental Affairs & Sustainability [64]

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And then maybe, Vikram, the dividend was paid in October. So that answers your second question. All right. So thank you, Vikram, for your question.

We've come to the end of our Q&A. If you have any follow-up questions, please don't hesitate to reach out to any member of the IR team. And we very much look forward to seeing you at the Investor Day in London on 25th of November. Thank you again for joining today. Operator, back to you.

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Operator [65]

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Thank you for your participation, ladies and gentlemen. You may now disconnect.