Swiss Re, the second largest global reinsurance firm, has reported lower profits in the fourth-quarter of 2014 as the firm suffered a hit due to certain restructuring in its life and health business, the firm also cited a challenging January renewal season.
Swiss Re reported that Q4 profits fell to just $245m compared to $1.2 billion in 2013, as the impacts of restructuring pre-2004 life business and the unwinding of an asset structure related to a longevity transaction took their tool.
In fact the life and health business suffered a $734m loss for the quarter and a $462m loss for the year, showing the impact from these actions. Swiss Re believes that by taking these actions now its business will be more profitable going forwards.
For the full-year Swiss Re reported net income was down at $3.5 billion, compared to $4.444 billion a year earlier. Low catastrophe losses helped the P&C arm again as the firm managed an 83.7% combined ratio in P&C and 85.4% consolidated across the group.
Earnings per share was down by over $2, at $10.23, compared to $12.97 in 2013. The result for shareholders may not be deemed so attractive, as the firm cut its special dividend to 3 francs, down from 4.15 france in the prior year. Added to its regular dividend, which is up at 4.25 francs, over 3.85 a year ago, the dividend returns are down at 7.25 francs from 8 in the prior year. Swiss Re also plans to buy back 1 billion Swiss francs of shares over the next year or so, which will likely help to keep shareholders happier.
Swiss Re’s Group Chief Executive Officer, Michel M. Liès, commented on the results; “Through our disciplined underwriting approach and active differentiation, Swiss Re generated strong earnings despite the challenging industry environment. We also succeeded in serving our clients by providing knowledge, expertise and services beyond our core re/insurance capacity. Our performance, together with our capital position, supports the proposed significant capital distribution of around USD 3.7 billion to our shareholders. In addition, we addressed issues in the underperforming areas. As a result, we are confident in our ability to reach our 2011–2015 financial targets.”
Swiss Re non-renewed a portion of its January renewal book, citing the challenging market environment. The firm renewed $9.2 billion of the $9.6 billion premium volume up for renewal, representing a decline of 4%.
Swiss Re said that these actions reflect “active steering of the quality of the portfolio and, where necessary, an exit from unprofitable business.” The firm said that pricing pressure hit it in January too, with “a decrease in risk-adjusted price quality by 3 percentage points to 105%” but maintained that the renewal book continues to “meet Swiss Re’s economic return hurdles”.
Property catastrophe rates softened across all markets, the reinsurer said, but showing that there is still margin in the business Swiss Re said that rates are still economically adequate. In casualty the reinsurer noted differences in price development by lines and markets, but said that it found opportunities for new, attractive casualty business being presented themselves in selected markets.
Swiss Re continued to find non-proportional business more attractive than proportional business, despite the price declines. But the firm feels that it was successful in differentiating its business through tailored deals and large transactions and said that it “generally remained firm on terms and conditions.”
CEO Michel M. Liès commented on the renewal; “This is an important renewal for our P&C Re business, as approximately 60% of our treaty book renews on that date. While this was certainly a challenging renewal, it was also a disciplined renewal.”
“While rates in total are down, our book remains a quality book. Importantly, Swiss Re remained firm on critical terms and conditions,” he continued.
On natural catastrophe reinsurance business specifically, Swiss Re reduced the percentage of its renewal portfolio that is nat cat to 18%, down from 20%, as it non-renewed some business here as it shifts its mix increasingly towards casualty and property lines.
Following this vital renewal for Swiss Re Liès gave an estimate of profitability of the P&C reinsurance book for the year ahead, specifically the expected combined ratio for the property and casualty business.
“We estimate this will be 97%, assuming a normal level of large losses. This is 2% points higher than last year, with the increase due to both the lower rate environment and a change in business mix at Swiss Re,” he said.
“We are writing more Casualty business now than last year. Casualty business typically has a higher nominal combined ratio than Property. Of course that does not necessarily mean the economics are less attractive. We prefer looking at business on an economic basis, as we believe that is what will drive long term shareholder value,” he explained.
The issue here for large reinsurers like Swiss Re is the bad loss year. When losses creep back above normal, say from large catastrophe events, and the overall P&C book is running a 97% combined ratio anyway due to the introduction of more casualty business, it will not take much to make it unprofitable. A number of bad loss years in a row could result in a string of disappointing results with this new business mix.
Swiss Re expects to deliver on its financial targets for the 2011–2015 period the firm said, despite the one-off charges and the expected uptick in combined ratio. Return on equity for 2014 came in at 10.5%, ahead of the targeted 8.6% for the year, although ROE for Q4 slumped drastically to 2.9% down from 15.4% in Q4 2013.
Group Chief Executive Officer, Michel M. Liès, summed up the results; “We expect the overall re/insurance market environment to remain challenging over the next years, especially for the smaller and less differentiated players. With this, a clear focus on profitability and economic growth is essential – so we can continue to deliver value to our clients and shareholders. With the two new Group financial targets announced today, we clearly show that this remains our top priority and long-term commitment.”
Challenging times for reinsurers like Swiss Re and the one-off charges associated with the life and health business make the results look much worse than they are. With large losses remaining low the firm continues to profit and be able to return capital, however the adjustments to the book as it shifts increasingly into casualty do make profitability look a little less certain in the P&C business going forwards.
Interestingly, and perhaps a good reflection of the challenges that reinsurers face, the FT noted this morning that Swiss Re’s share price is up just 1.4% so far this year, compared to a rise of 11% for the Stoxx Europe 600 Insurance Index.
Uncertainty continues to surround the future for large reinsurers. As a result, questions continue to revolve around just how much the challenging market, lower pricing, competition from new business models, alternative capital providers and insurance-linked securities (ILS), will impact their profitability going forwards.
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