Swiss Re AG (SREN) Earnings Call Transcript & Summary

Welcome, everybody. Our Global Economic and Insurance Outlook event for 2023. And I'm Michael [indiscernible] from the Media Relations team. I welcome you all here in the room and those of you on the line. We'll get started in a few moments with Jerome Haegeli, our Group Chief Economist; and Charlotte Mueller, our European Chief Economist. [Operator Instructions] When the Q&A comes in, we'll take questions from the room and also questions online. [Operator Instructions] And with that, I'll hand over to Jerome.

Okay. Fantastic. Thank you very much, Michael and thanks very much, everyone, for coming here in person as well as joining online. I'm going to be joined in momentarily by Charlotte Mueller who is Chief Economist for Europe. So this is our sigma for the economic outlook, insurance economic outlook and the economic outlook for 2024, 2025. Now if you look at this picture, I think it basically covers already the bottom line what we expect for markets and for the macroeconomic outlook. It's chilly out there. We see risks on the rise and it's not that all that bad. You see also some sun. However, it's definitely pretty cold. We expect the economic slowdown to start globally pretty soon, and we see actually already Europe and Germany in a technical recession. Not all that bad because we are now also at the peak of interest rates and interest rate we talk about that very briefly is also something which is definitely very, very positive for the insurance industry, but not just for the insurance industry, also for financial markets. In terms of the broader outlook and as covered in our sigma report, the letter R, it stands for resilience, the resilience in insurance industry can't be right. And there, they definitely need more resilience. Second, R, it stands for risks, no question risks have increased. It's not just the macro risk, legacy of past -- prices, it's also the geopolitical risks and the question, how are we going to fight the next crisis? And the other R, it stands for real rates. Real rates, we are in a different regime, real rates will stay higher, and that's the really, really good news for our industry, but not just for our industry, real rates being positive is what we were used to before the global financial crisis. Positive real rates are here to stay and not going back to negative territory anytime soon. Also covered in our sigma another important topic, we also see R like reindustrialization. I will come to that later on. Reindustrialization, resilience in all these areas, the insurance industry has a very, very important and positive role to play. Last R stands it for number 1 question now, the more immediate #1 question out there. Are we going to go in a recession environment in the U.S? Are we going to have a soft landing or not? Or are we actually reaccelerating? And there's no question that 2023 was a year with many surprises on the macro front, positive surprise that it's the consumer was able to withstand the shock and consumer resilience definitely was a big surprise. I'm going to speak about that later on with the key point being made, we shouldn't be too hopeful in terms of a soft landing. Soft landings are extremely rare. Now with this and before going into the details for our forecast and you will see our forecast in the next slide, but first, on the question, how 2024 will look like? How 2024 will look like? Will it look like 2022? Remember 2022. 2022 was extraordinary. Why was it extraordinary? It was extraordinary because you had both on the interest rate front, fixed income front as well on the equity front, you had a total return loss of more than 15%, more than 15% on the equity and more than 15% on the fixed income. That was 2022, and you had that because of the interest rate shock. 2022 was the year that all central bankers or most central bankers were thinking and communicating that inflation is transitory, but it wasn't transitory and they had to increase rates. You weren't protected by a 60-40 portfolio, 60% equities and 40% in fixed income or the other way around. There was no way to hide. 2024, will not look like 2022. We see markets being up this year, and we would expect also specialty fixed income market next year to do pretty well. 2024, the question might be also maybe will it look like 2008? The global financial crisis, I don't think so either. Global financial crisis, you had a lot of weak parts in the system and you had also a weak banking system. Banks are much better capitalized, and I think also the framework surrounding capital markets with unconventional policies is much, much stronger and established -- and established with frameworks they didn't had in 2008. Now maybe last question and you wonder why do I show 1969? I show 1969 because it's important. 1969, you had the moon landing. Moon landing, yes, the moon landing, the U.S. landed on the moon, 1969, the first person human on the moon and 1969 was the start, actually, when you looked at academic research from the Fed, but not just from the Fed, a lot of economies were talking about soft landing. You had moon landing and then you had the imagination of economists getting up and running and starting to believe in soft landings. Now 2024 or 2025, are we going to have a soft landing in the U.S.? We are not forecasting a recession, but we are forecasting 5 quarters of subtrend growth rates, 5 quarters of subtrend growth rates. That's a very weak environment. And I think if you think about moon landing and soft landing, it's definitely the case. But the soft landing is much rarer than moon landing. And you had basically post war period, you had maybe 1 soft landing. And you had human and nonhuman moon landing 2021, just to give some perspective. Well now, let me show you the key figures in terms of our reports in terms of our outlook, first on the macro front and then later on, on the insurance front, likewise, the highlights. On the highlights for the global economic outlook, yes, bottom line is global economic outlook and the momentum on the global economy is slowing down. We are forecasting, as you see on the table, we are forecasting global growth to come down from 2.6% to around 2.2% which is noticeably slower than market consensus at 2.6% and market consensus already discounts a weak growth environment. Four key points. Number one, there's a lot of divergence in terms of economic growth momentum. You see the U.S. and euro area growth diverging and this divergence will continue in 2024. As mentioned before, Germany likely in a technical recession and the same might happen to Europe, and Charlotte will speak more about that. U.S. growth -- stellar growth rate at 2.4% expected this year. For next year, we see that slowing down substantially to below trend growth. And as mentioned, monetary policy transmission will have an effect on global growth and also on the U.S. economy. Second point, inflation, super important, right? What's happening on inflation front for insurance companies through its effect on claims. Now inflation and it's this inflation, economic disinflation. Economic disinflation is price is coming down, that they continue to expect in '24. And if you see the figures for the U.S. we expect CPI inflation to come down from 4.2% to 2.7%, but still above target. And for the euro area from 5.6% to 2.7% and from the U.K. from 7.4%, around half to 3.4%. So the course and direction is definitely good, but the last mile, the last mile on the inflation front is what is the hardest to do. And we do not believe that 2024 I think the banks will be able to really finish that last mile. They will need to require to be restrictive with monetary policy because you also see core price pressure inflation on the core prices front, be it services, also shared the inflation keeping the inflation levels high. And what's more labor markets are also very tight. And you cannot have inflation coming back to target if market doesn't weaken -- the second point, inflation is still a key risk. It will come down, but it will take long. And number three, on the monetary policy and interest rate front the regime shift that we had seen in 2022 with the interest rate shock which was needed and interest rates will be higher for long. It could be even the case, we are expecting the Fed to cut next year. But it could be the case that monetary breaks are not strong enough to bring back successfully inflation to target. So the risk in the U.S. is rather no rate cuts than cutting much more. So monetary policy will remain restrictive until they have confidence that the inflation target is within reach. And for that, you need to continue to run a restrictive monetary policy. Number four, on the terms of the economic risks, we see the economic risks to be on the downside. Yes, we had the Middle East and we have the Middle East tensions on top of the war in Europe and Middle East tension open ups another -- yes, another channel to which the inflationary pressure could increase again if the Middle East tension actually would enlarge regionally. So definitely, it's stagflationary risk. They are here. You go out to that Europe has a stagflationary environment. I am sure Charlotte will speak more about that momentarily. In terms of looking a little bit deeper at U.S. and Europe before handing it over to Charlotte, in terms of U.S. and Europe, we have seen this year, U.S. doing much better than Europe. This will remain the case next year. We continue to see this divergence in terms of growth within Europe but also Europe versus U.S., but also in Asia, we continue to see that happening. So Europe is pretty weak. U.S. surprisingly strong, but will weaken and China has its problem of its own with real estate issues. However, there in China, if you look at policymakers stance, and there are also very clear signals and efforts to stabilize the situation, which is definitely positive. Two points I would like to highlight in terms of the graph point number one, and if you look at the graph on the left-hand side, you see economic surprises. This is an indicator which tells you how the macro data comes out against expectations. And you see for the euro area, you see for United Kingdom and almost also for China, surprises on the macro front are negative, meaning the data do not meet expectations or negative surprises. This is not the case in the U.S. where you have now a number of quarters of positive surprises. Probably this line that you see with the pink line in the U.S. that is going to come down. On the right-hand side, what do we watch in the U.S.? We definitely watch very closely labor markets. Labor market situation is still too tight. If you look at the vacancy to unemployed rate, it's 1.5. It's down from the level peak of 2.0. But usually, you have for each unemployed 1 vacant position. If you have 1.5 open position for each unemployed, it means the wage pressure. This is also super important for an insurance company, if you think about workers' comp you will have inflation and workers' comp inflation remaining strong. Capital expenditures, CapEx that you see that with the dark blue line, that is all something which is worthwhile to watch closely, and you see it's negative, however this is maybe also an early sign, but an important structural sign, but also a downshift in terms of growth is to be expected in the U.S. economy. So with this, let me hand it over to Charlotte to highlight the U.K. and Europe.

Perfect. Thank you very much. So I'm Charlotte. I'm covering the macroeconomic research and forecasting for Europe at Swiss Re, and it's great to be back in the U.K. So I'm going to dive in a bit more on the themes what Jerome mentioned, but specifically on the U.K. And I think here, the key story remains inflation. So Sunak, he has achieved his goal of housing inflation, but I would just say that, that does not mean that the -- sorry, that the cost of living crisis is over. And in fact, I would say that there are still some underappreciated risks to watch. And there, I would say there are 3 key reasons. First of all, sure inflation rates have halved, but the price level has not halved. So if you look at the actual aggregate consumer price index, it's still higher than before. It's just increasing now at a slightly slower rates. Why is this important? It's important for consumers because they still are worse off. And it's also important for insurance companies when we think about claims. Second reason why the cost of living crisis is not over is also if you look at real incomes. So yes, if we look at current data now, average hourly earnings, they are also higher than the current inflation rate. That's great. But if we zoom out and look at the last 2 years, you still see that real wages haven't fully recouped all the inflation surge over the past couple of years. Also related to that, if we look at the wage increases, A lot has been due to onetime bonuses or sign-on bonuses rather than a sustained increase in the actual base salary of employees. So still consumers are going to be struggling. And I think that also speaks very much to the inequality topic, which is the chart you can see here on the left. Where there, you can see that real incomes have been decreasing, but also widening in terms of inequality. And there are some stats, the Gini coefficient, for example, for the U.K. is worse than Germany or France, but -- and not far off from the U.S. And if you look at some other stats, for example, low-income households, their situation has also been deteriorating. A latest stat shows that in October, you had one quarter of low-income households, essentially use debts to pay up for food. So that can also affect insurance demand. Third point I wanted to also say related to the cost of living crisis is we have the autumn statement tomorrow. And we also expect that support from the government is also going to reduce or not be as strong anymore for lower-income households. So as a result, that brings me to the other chart here on the left, which are strikes. So while we do think that the peak is behind us in terms of strikes, we would still not underestimate the risks of some potential flare-ups still, not just this winter, but maybe we have some seasons of discontent in the future. And if you zoom out the strikes that we saw over the past year, they don't look that bad compared to, say, the 70s or 80s, but they still have a cost for the economy. So from June to December last year, the strikes that were in the U.K. were estimated to have resulted in 2.5 million working days that were lost, which equated to roughly GBP 1.5 billion, GBP 1.7 billion loss for the economy. So it still has an impact, and that's also key to watch when we think about the overall health of the consumer, but also to keep in mind for the insurance industry. That brings me to my final point before then also we look at different scenarios, which is recession. So the U.K. is going to be facing a recessionary-like environment. And actually, if you look at polls, 2/3 of consumers actually say they think the U.K. is in a recession. We're not officially in a technical recession, but certainly, the environment will feel like one also for the next year. And there, it's not just because of higher interest rates filtering through. And by the way, actually only roughly one half of the rise in interest rates has actually filtered through to the real economy. So they're still paying ahead. And the second point is also a lot of the tailwinds that has helped us so far, such as excess savings from the pandemic, they are also winding down. So the overall outlook is still one of very subdued or almost flattish growth, and that's also where we differentiate from consensus. So we have a 0.2% real GDP growth forecast for the U.K. next year versus Bloomberg consensus is at 0.4%. And that's also why later on, when Jerome will talk about the insurance outlook, this subdued growth environment means that we do expect real premium growth, so net of inflation to decline in the U.K. to around 1% versus around 2.3% this year. One final slide before handing back to Jerome. I think as all economists, it's always key to look at alternative scenarios, too, given the extremely uncertain environment. And there, I would just flag 2 downside alternative scenarios to watch. The first up is a 1970 style structural stagflation scenario. This is the case where we have potentially further inflation shocks, say from, for example, geopolitics, or further wage price spirals, think again about an unexpected rise further in wages that could lead to inflation being higher for longer and then also the Bank of England having to unexpectedly raise interest rates higher. This would have serious consequences. Otherwise, the alternative could be a severe global recession where what could happen is that the economy turns much faster than what we are expecting. You could have potential financial market accidents that lead to a much more significant growth slowdown and then also that could actually bring down potentially inflation. But I'll hand over now to Jerome to speak a bit more on what this means for insurance.

Thanks a lot Charlotte. Now let's turn the page to the insurance of our insurance premium forecasts and also a key topic on insurance form before then going to 3 key themes, and then we'll open up for the Q&A. So number one, on the insurance outlook. On the premium side, we expect global premiums to grow, to grow above the last 5 years. So that's the good news. However, it's still below the trend growth as we have been seeing pre-COVID. So premium growth, it's strong also because of some of the lag effect that we have seen washing out in terms of health insurance. That is one of the reasons, but it's below the pre-COVID growth rates. EMs if you look at what drives growth in the premium side for insurance market, and this is for direct insurance premium growth. You see still emerging market powering ahead insurance market premiums. Number two, on the pricing front. On the pricing front, we expect the hardening market to continue. We still see a lot of economic price pressure, and we shouldn't mistake that economic disinflation it means inflation coming down, but it doesn't mean price level coming down. And also, we have social inflation and social inflation, I would expect it to go definitely the other way to economic inflation, meaning social inflation going up, economic inflation going down, and that together will continue to provide for a hard market. Number three, in terms of profitability, higher interest rates, and this is also the topic right of the Monte Carlo and sigma cost of capital, higher interest rate without a question is positive for insurers profitability. And we expect insurance profitability, ROE, the return on equity to be around 10% over the next 2 years. However, if the interest rates are higher, the cost of capital is also higher. And according to our estimates, sigma estimates, we do not expect that the prime insurance industry is actually able to earn the cost of capital next year or in 2025. So there will be still a gap. There will still be an underwriting profitability gap, but the underwriting profitability gap is narrower than what it used to be. In terms of the risk, what we need to watch looking at, I mentioned already social inflation and the effect it has on longer tail lines like casualty and obviously, when interest rates come down again than the casualty business will also be more exposed, especially then if social inflation increases. That's number one. Number two, we should also watch on Life side, given the sharp interest rate repricing and regime shift, we should also watch a lapse risk. So with this, maybe coming back to what mentioned just before, right? The higher -- they have the higher interest rate, definitely, having the nominal financial inflation that we had over the last 15 years. having had that was bad news, bad news for savers, bad news for pension industry, bad news for long-term investors and for insurance companies. And now good news is we're back to normal in terms of the interest rate environment. Finally, risk free rate is not return free and 100 basis point or 1 percentage point increase in investment yield, we are estimating leads to an improvement of the combined ratio of around 2.5%. And if you look at U.S. interest rates, what we have seen in terms of changes over the last 2 years, we saw U.S. interest rates increasing at least reinvestment yields by 2.5%, 250 basis points, and that leads to a combined ratio improvement of a little bit more than 6%. And that's huge, 6% combined ratio improvement, is really huge in terms of additional claims. In this case, U.S. P&C industry can take on board. Additional claims they can take on board is $50 billion, around $50 billion, which is, roughly speaking, NatCat budget that U.S. P&C industry has. And I think let me give you these figures just to show you the power of interest rates, and showing that with interest rate back to normality, insurance industry can provide much better and much more resilience. And I think this is really the key message that we can provide now more resilience in the market while we really need it given that the risks are up. And risks are up, you still see that with the graph on right -- on the left-hand side, protection needed on the NatCat front for U.S. P&C industry, it's the blue line protection needed. You see divergence with the capital which is around. And with higher interest rates, we would expect that the capital is being restocked or the capital increases and that which between protection needed for NatCat in the U.S. and capital available that, that declines. Global protection gaps, $1.3 trillion. That is a record high and having higher interest rates will help to narrow the protection gaps. With this, let me turn to 3 key things. Number one, why do we expect the global economy to slow down so sharply? And why didn't you have a recession this year in the U.S.? Well, first of all, the consumer was much more stronger than expected. But also -- and you see that on the graph on the right-hand side, the corporate as well as the household market structure in terms of how the loans are structured, whether they are fixed or flexible and how long term the loans or it's after 15 years of low to negative rates, U.S. is standing out at having about 90% of the corporate bond market being fixed, and also extremely long-term loans. U.S. still stands out and is best protected at least the corporate market, best protected from the increase in yield costs as well -- an increase in yield costs as well as the increase in mortgage rates. However, it doesn't mean that it's protected forever. It just means monetary policy transmission lag takes longer so key point here, the economic pain will also be coming to the U.S. But probably what's more the case for now is that the U.S. is exporting its strong dollar and strong yield environment and other economies than the U.S. feel that pressure actually more. On the graph on the left-hand side, you see real yields, you see that sharp increase in the real yields, real yields across all jurisdictions are positive again, exception is Japan, but Japan might also join the club of positive real yields next year, and that would be, again, a push up for higher interest rates environment. So definitely, economic pain is yet to come, and it's not because a recession hasn't happened, that recession will not happen. And what's more a recession averted is not a recovery either. Theme #2, we should watch our fiscal risks. And this is the question also of how are we going to be able to fight the next crisis. We used monetary stimulus like no -- like we didn't know it existed before 2008, with unconventional policies. We used for COVID, we use fiscal policies, we definitely needed given the government shutdowns. However, we have now legacies of cost crisis and legacies of cost crisis, if you look at public debt in the U.S., public debt in U.S., public debt to GDP is about 122%. So public debt around the world it increased, but the flip side is also the debt servicing cost increases because of higher interest rates. And we expect debt servicing costs in the U.S. to double over the next 30 years. And higher interest rate fiscal risks on the balance sheet and high debt especially making the situation for low and middle-income challenging, about 20% of low to middle income countries have actually been distressed. The other point, I think, which is important to look at, and this is also a fallout of higher interest rate and what it meant for the bond holdings is the annualized losses on asset holdings of the key central banks. And here, the Bank of England is actually standing out with having almost 8% of unrealized losses because of the repricing of yields. I mentioned this. I mentioned this because it's important, because it means that when you have a negative equity for Central Bank -- Central Bank doesn't go out of business. But a central bank will either ask for recapitalization. And when you ask for recapitalization, you go back to the government and then the mandate is being -- it will be scrutinized and you are exposed to the political risk. And that's the risk, the politicization of Central Bank is the risk, having missed inflation target and now obviously also carrying the costs of its own activities of the past. Theme #3, is a very important one. It's a long term one. It's the reindustrialization. It's the rise in industrial policies. And there are a number of drivers for the rise in industrial policies. It's geopolitics. It's the reconfiguration of supply chains and it's also greening the economy. This all leads to a rise in industrial policies that we see all around the world. For the insurance industry, this has a number of important effects, and we expect commercial insurance coverage to benefit actually of the rise in industrial policies and insurance industry has a really, really special role here because it can help to derisk the transition that we have with the rise in industrial policies. And in the table here, you see the various effects for the line of businesses.

And I think just to add there also from the UK perspective. So I think this is also an opportunity. If we think about regardless who will be in power, whether it's the conservatives or whether it's labor next year as polls would suggest, I think both will want to have increasing presence of the private sector to help to fund growth in the future. Because of the prior slide that also Jerome mentioned, the government is going to be much more constrained with fiscal risks. And there, we're already seeing the headline news some initiatives, for example, in the pension funds, in where invested assets can be used to potentially fund investments in the real economy. And I would watch potentially this space could be some further opportunities maybe on the regulatory front. Also for our insurance companies, but it's a growing topic. So I think that's also just one area also on the U.K. side, which is relevant to watch.

Thanks Charlotte. Well, I'm extremely positive at least in terms of infrastructure investments and the various initiatives that exist to actually increase the investment into sustainable infrastructure because that means more jobs, more growth, and it also helps the net 0 of the economy. Let me with this wrap up and then -- with the key takeaways, and then we can open up for Q&A. Key takeaways: number one, global economic pain is yet to come and the global economy will slow down. We will see higher interest rates for longer. Inflation is also coming down, but it will take at least not until central banks are able to meet the inflation targets. Number two, while we see growth slowing down, thanks also to higher interest rates, but not only because of the higher interest rates, we see profitability of insurance companies of primary insurance companies improving. I spoke before about return on equity of around 10%, which is our estimate for primary insurance markets, but still, there's an underwriting profitability gap. And that's why not the only reason, but that's why you continue to see and expect a hardening of the market as primary insurance players do not earn the cost of capital yet in 2024. Number 3, uncertainty, without the question is very high. They're very difficult to pricing and this is why scenario monitoring, which we do on a continuous basis and always do as a tradition in this sigma outlook, which Charlotte presented. It's really important to have this close to home and look at the scenario and the scenario signposts, and you will find more in the sigma report. So with this, thank you very much for your attention here in the room and also thanks for the attention, online. I pass it over to you, Michael.

So we'll now open up for Q&A. [Operator Instructions] Roland in the room would be first.

Roland [indiscernible] I just want to get your thoughts more on the Israel Hamas war, geopolitical risk, generally, how concerned are you about that war and the possibility that the conflict might spill over to the wider Middle East? And your thoughts on how concerned you and [ Ensure ] should be about geopolitical risk and anything they can do to prepare for that?

Yes. Happy to take that. Well, first of all, I'm concerned as a citizen of the situation in Ukraine, but also in the Middle East, extremely concerned. As an economist, and we have more in the sigma report, we look at the scenarios and if we see that situation escalates and escalate means that if the situation in the Middle East, if you see more countries being involved, then you have a high risk of commodity price shock. And it's mainly to the commodity price shock were actually the effect of the war in Middle East would be felt economically. If you have -- just to give you numbers, if you have an escalation, you're probably going to see oil prices at $150 per barrel or higher and then it opens up the scenario of a global recession. And again, that's why, for us, if you look at the scenarios that Charlotte presented, that's why the overweight the 2 downside scenarios, stagflation and global recession. We had such a high likelihood and for an upside scenario and as an insurance company is obvious, right? If you have higher inflation, which would be the result of this commodity price shock and the recession that's a drag for the industry. That's a drag for the real economy.

I would just add, we have 2 pages on it on Page 17 and 18 of the sigma where we talk exactly about those scenarios, which Jerome mentioned.

Vincent from Insurance Asset Risk. Can you say a bit more about the outlook for Chief Investment Officers for the coming months when you consider -- you mentioned fixed income market doing well next year. You also said infrastructure, an area of opportunities, but you mentioned large risks. What's the outlook for a Chief Investment Officer at insurance company for the next year or so?

Well, we have to -- you would have to ask the Chief Investment Officer, but to give you the outlook from a chief economist point of view. From a chief economist point of view and from our analysis and please Charlotte also add, I mean, who would have thought 2023 fixed income is boring. And who would have thought that you get with T-bills, so short end of the curve in the U.S., you get 5% plus. And you get -- it's great returns. I'm positive for fixed income returns. I'm positive for higher quality credit, higher weighted corporate credit, you get 7%, 8% in the U.S., that's great returns. These are returns precrisis, we wouldn't have dreamed about. Equities, equities valuations are stretched. Dividend yield, it's lower than the yield that you get on the bonds side. For me, equity investment is very much a sector-driven investments. So positive from bonds, positive on certain sectors on the equity side. And on the infrastructure point, yes, infrastructure point, especially for insurance companies. I think for any CIO of an insurance company, given we are long-term investors, we need the duration. We do ALM, asset liability matching, and you get the duration in infrastructure investment. But the problem is just there are not so many bankable projects. But definitely, that's why also I think it would be a win-win if you would have finally more infrastructure investments and infrastructure projects to invest in. That's why we have been calling for a tradable asset class for quite some time. It's a win for the real economy. It's win for the asset investor. I don't know if you wanted to add anything.

Yes. No, I think, yes, Jerome, you added it. In terms of impacts for then the investment portfolio, of course, it takes time as and how bonds mature and you reinvest, but for sure, the end game is it helps to narrow the profitability gap.

Okay. We have a question from John.

John [indiscernible]. Charlotte, can I pick up on your comment around whoever wins the general election in the U.K. the line you alluded is they are going to lean far more heavily on the private sector to drive growth. How do you see that playing out?

Yes, sure. So I think it will -- of course, it will take time. But I think the current labor government or the -- sorry, the future labor government, if they get elected, they will be constrained from the fiscal side and will have to look into the private sector to tap growth. And there, it's about looking at incentives. So we may already see some incentives unveiled tomorrow at the autumn statement. But it will take time in the sense of subsidies, tax incentives that could encourage private companies to invest. On the reinsurance side, 1 -- or insurance side, GBP 1.7 trillion assets are under management in the U.K. So if you can tap into those GBP 1.7 trillion of assets part of that to bring growth opportunities, be it for climate initiatives, digitalization initiatives in the real economy that will be positive. But of course, this is something which affects more the structural outlook and what we have presented here is more the cyclical outlook for the next 1 to 2 years, and that's something that takes a longer-term view. But I think also something that we've seen in the news is, there's also a lot of pressure for company financing. A lot of companies also in the U.K. have been going abroad, say, to the U.S. because of more favorable financing initiatives. So I think we will start to see also increasing pressure, whoever is in power from the U.K. government to also attract financing for growth opportunities in the U.K.

You have another question in the room.

It's Ben Dyson from S&P Global Market Intelligence. I just wanted to wonder if you could clarify the point about higher interest rates and improving underwriting profitability. You can see how it might improve the profitability of insurers overall, but just on the point you're making about the effects on the combined ratio. And also, what sort of you mentioned about the cost of capital and I am sure it's not yet maybe not for the next 2 years. Just what the level as you're thinking of that they need to hit now that interest rates are higher? And I did also have a quick question on lapse risk. You mentioned that there's we've seen a bit of that, I think, in 2023 on the Life side. Just interested whether you -- what you're expecting there, whether it could get worse?

And maybe the first one on lapse risk, we see that's being contained. We see certain smaller European countries having higher lapse risk. But yes, we are not overly concerned. And if I say overly concerned, I'm thinking about -- I'm talking about the market overall, right? The primary insurance market. But definitely, it's something to watch out, given you had this interest rate shock. That's the lapse risk. And now to the effect of higher interest rates on the combined ratio. You have asset leverage that asset leverage is about 2.4, 2.7, and higher asset leverage it -- asset leverage in general, it means that if you have a 100 basis points increase in the reinvestment units, you have a multiplicator effect of what it means for the combined ratio. Happy to share with you more detail and the mechanics, but the bottom line is about 100 basis points increase in reinvestment yields leads to 250 basis points improvement of the combined ratio because of the asset leverage. But again, if you look at the U.S. P&C industry and that's the reference I made in the slide. And for the U.S. P&C industry, we saw over the last 2 years, around 250 basis points improvement in investment yields and that 250 basis point improvement leads to an improvement of the combined ratio of a little bit more than 6 percentage points. And if you would translate of what a 6 percentage points combined ratio means for the U.S. P&C industry, then you get it with $50 billion of additional claims that the P&C industry in the U.S. could carry over. And again, that's about the NatCat budget U.S. P&C industry has. But happy to share more information with that. Our expectations for the return on equity for next year and as well as the year thereafter for primary insurance markets are about 10%. So it's a clear improvement. Before it was around 6.5% or 6.8%, clear improvement. However, the bar is also higher because of the interest rates and the cost of capital on average for primary insurance player is about 12%. So there's still an underwriting profitability gap.

Roland we have a question online, can I come back. Great, so we have [indiscernible] has his hand raised.

I have 3 ones. Maybe you can say some words about the German markets developing in P&C and Life & Health and to a greater look how will the results of the report influence the planning of the Swiss Re. This is the most important question for me. And third, you spoke about the improve of interest rates. What does it mean for the managing of assets for the Swiss Re?

Well, the first last 2 questions of what it means for Swiss Re and what it means for the managing of assets, we're going to have the Investor Day very soon, and you will hear more about it. But just to be clear, the forecast that we provide here, we also use it right in our group planning. These are the last 2 questions. In terms of the first question, you asked about the German P&C and Life & Health to give more updates. Charlotte mentioned the difficult environment that we have in Germany. So technical recession, and that means lower premium growth. Premium growth in Germany, we see more subdued relative to European average. That's number one. And on the Life and Health side, the really positive news is also, in my home country, Switzerland, but also in Germany, you have finally the whole interest rate curve bonds, right, not being a negative territory anymore, meaning you get also positive yields for investment in German bonds. And that's a big driver for the savings industry. Now savings industry is coming back live. And you have more numbers for that in the sigma report. But globally, on average, we expect Life & Health to grow by 2.7% and especially in economies like Germany and Switzerland, where you had negative rates. You can't have annuity business and the way we used to have if you have negative rates. So that's definitely positive news for the annuity business that you have, again, grades where there used to be precrisis, pre-global financial crisis. So good news, I would say, for Life & Health industry for the P&C more challenging.

Next Roland you.

Maybe more of a niche question. I'm not sure if you can cover it. In the pension risk transfer bulk annuities and so on, I just wondered if Swiss Re has a particular outlook, for example, in the U.K., the market is very buoyant, people are predicting 40 billion to 50 billion. I just wondered if Swiss Re has a particular outlook, say, for the U.K. or PRT generally?

I would have to come back on that. We have definitely a global picture. We just -- Swiss Re Institute published a report on the global savings gap. And there the point is given where interest rates are, again, back to normality, it's definitely for all savings in this industry, including here in the U.K., it's a positive driver now to the specific U.K. pension projections, I would have to come back, but I would be happy to...

What -- do you have any expectations for COP next month? And what would you like to see to come out of this year's meeting?

Well, I would like to see -- first of all, policy commitments for 1.5 degree temperature increase by 2050 policy commitments, which are consistent with the Paris Agreement, that's number one. Number two, I would like to see a cooperative approach across the key countries because if you don't have the global corporation, it's just much more difficult and challenging to reach the net 0 agreement and to fulfill Paris Agreement. And then number three, but you won't see it at COP '28. Policy commitment is one thing, policy action is the other and it's important that all policy commit -- all commitments, whether it's a private sector and public sector that these commitments are being followed through.

[indiscernible]

I don't want to make any prediction on that.

Okay. So we have no more hands up online. Are there any further questions in the room? Great. So thanks, everyone, for joining us online. Please feel free to drop us a line at media_relations at Swiss Re. If you have any follow-up questions. For those of you in the room, there's some coffee and hopefully some food outside. It's lunch time here in the U.K. So thank you, everyone, for joining.

Well, thank you very much for coming and engagement. Thanks a lot.

Thank you.