Reinsurance pricing down, but still attractive. Pressure felt: Swiss Re

Swiss Re is the latest of the large, global reinsurance firms to report its results today and, similarly to competitors Munich Re, Hannover Re, the reinsurer reported pricing down but still attractive at the January renewals.

Reinsurance pricing, particularly in property catastrophe business, saw further steep price declines in January. The steepest declines are being seen in the more commoditised, and well modelled, U.S. property catastrophe market, while the rest of the world and emerging markets saw slower declines or flat rates.

For the world’s largest reinsurance firms, such as Swiss Re, Munich Re, Hannover Re and others, the impact of the declining rates cannot be altogether avoided, however given their global and diversified portfolios of reinsurance business, they can at least avoid the worst.

Swiss Re reported today that its property catastrophe reinsurance renewals were successful, albeit at lower rate levels which it described as still attractive. However Swiss Re’s report of its reinsurance renewals may not fill its shareholders with confidence for the rest of 2014.

Overall at the January renewals Swiss Re underwrote 6% less business, as its underwriting volume fell. In terms of pricing, Swiss Re an average risk-adjusted price decline of 3.6% across the business it underwrote. Swiss Re said that its active cycle management and adjustments to its portfolio reflect the anticipated market trends for 2014. At the same time Swiss Re is particularly strongly engaged in non-proportional business, which it finds more attractive.

This is a similar story to Munich Re’s, which said that it had responded to the increased competition, high levels of capital and reduced rates in the reinsurance market by adjusting its portfolio at the key January reinsurance renewals.

Hannover Re also reported that it had adjusted its business mix, pulling back in areas of its reinsurance portfolio where it deemed rates not attractive anymore.

This strategy, of following the better paying business and pulling back on that which is unattractive, is easier for these large reinsurers which have the advantage of a huge, global and diversified book of business as well as insurance operations in some cases. The question is how long could that continue, if rates keep declining and the influence of alternative reinsurance capital continues to impact global reinsurance markets?

With alternative capital and the capital markets increasingly making an impact on the casualty reinsurance markets, the large, diversified reinsurers must be wondering where they will find themselves squeezed next. Competition is rising too, with more start-ups launching, asset managers joining the reinsurance space in hedge fund backed vehicles and other reinsurers actively managing lower-cost capital too, the pressures for major reinsurers may begin to rise.

Analysts have not been particularly complimentary of Swiss Re’s prospects for 2014 today, highlighting that the price declines it suffered at the January renewals seem worse than its peers. RBC Capital Markets analysts point out that Swiss Re has a higher proportion of property catastrophe reinsurance business than its peers, potentially leaving it one of the more exposed to market competition, price declines and the influence of the capital markets.

Swiss Re said that it expects pricing at the upcoming April and June/July reinsurance renewals will not see such steep price declines.The reinsurer said in its results; “The next major renewal dates are in April and July, when Swiss Re expects less margin erosion in natural catastrophe business than experienced in January and stable rates in casualty lines.”

Not everyone agrees. Some feel that the April renewals, particularly in Japan, could see some further declines in catastrophe reinsurance business. How the Florida and U.S. property catastrophe renewals go at the mid-year is uncertain, but there is the potential for declines of 10% in some regions, at least according to some observers, if there is no change to the market dynamic by then.

RBC Capital Markets analysts Kamran Hossain and Gordon Aitken said that they expect Swiss Re to continue to shift its business focus to avoid competition and capital markets influence on pricing. They said; “With falling prices in catastrophe reinsurance, impacted by non-traditional sources of capital, we expect that Swiss Re will move into casualty more meaningfully.”

With the capital markets beginning to move into the casualty reinsurance market and new entrants set to raise competition, this may not be as easy a move for Swiss Re as it would have been even six months ago.

Swiss Re will also return more capital to its shareholders, something most reinsurers are expected to do in 2014 as they find returning capital gives more shareholder value than investing it in the business due to limited attractive opportunities.

Swiss Re is aware that it faces pressures in the current market environment, but as one of the largest it can likely continue to profit. However at some point issues such as expense ratios may begin to look a little unwieldy at large, global firms, particularly if the capital markets continue to take market share in catastrophe and now casualty reinsurance.

Chairman of the Swiss Re Board of Directors Walter B. Kielholz commented on current market conditions; “We face headwinds from a few sources, such as regulatory developments as well as the inflow of so called alternative capital into re/insurance markets. I am confident that we have the right business model in place to withstand these pressures, but we need to watch these trends carefully, analyse what they mean for us and respond proactively.”

Group CEO Michel Liès also recognised the pressures that Swiss Re faces, saying; “Meanwhile low interest rates have played a large role in driving pension funds, hedge funds and others toward reinsurance, where returns are perceived to be comparatively high and not correlated to other assets, while barriers to entry remain low. This inflow of so-called alternative capital intensifies competition and increases pressure on our industryʼs profit margins.”

Given the scale of a reinsurer such as Swiss Re the threat of alternative capital and the inflow of institutional money into reinsurance markets is real but it has the diversification within its business to continue to meet expectations for the moment.

Liès continued; “We are not impervious to these forces. But in comparison to some small and medium-sized competitors, we  believe we have more to offer than ‘just’ capacity. I am confident that we have an agile and flexible business model that will allow us to continue to profit in this challenging environment.”

It is interesting that Liès highlights this fact, that small to mid-size companies currently look more under pressure. In reality, while smaller reinsurers may come under direct threat if their focus is too narrow, for larger reinsurers difficulty will also exist and nobody is guaranteed an easy ride while the market is in flux.

One area that Swiss Re is targeting for growth is in growing natural catastrophe insurance and reinsurance in emerging markets. The reinsurer said that margin pressure from alternative capital in catastrophe reinsurance is offset, to some degree, by strong growth of natural catastrophe insurance pools.

Swiss Re notes that competition in natural catastrophe reinsurance is expected to become stronger, as capital markets participants and investors expand. Swiss Re is actively pursuing multiple avenues to offset the impact of a softening market. The reinsurer said that it is working with governments, NGOs, and insurers to extend catastrophe insurance to segments which have not historically been covered.

While this is a good strategy and should help Swiss Re to gain market share in emerging markets and replace some of the profit lost from the competition provided by alternative capital, there is a possibility that all these efforts will result in is new markets where alternative capital will find a place to play.

If the lower-cost and the efficiencies of non-traditional reinsurance capital are valued in developed catastrophe reinsurance markets, those same features may find themselves even more valued in emerging economies, where cost will matter and alternative risk transfer structures may be more suited. That could mean that reinsurers like Swiss Re don’t have their emerging market expansion ambitions all their own way.