Swiss Re hit by losses, still expansive, but pulls back on U.S. hurricane risks

Global reinsurance giant Swiss Re reported a set of results this morning that were hit by major catastrophe losses, taking its combined ratio to the highest its been since 2013. The reinsurer remains expansive in its strategy of deploying more capacity, but has finally pulled back on U.S. hurricane risks.

Over recent years, when reinsurance prices have been on the decline globally, Swiss Re has actually been quite expansive, choosing to deploy capital into underwriting, particularly in large, complex, tailored transactions, but also into areas like property catastrophe risks where the price declines have been at their highest.

But in its latest results, (for more traditional reinsurance market news please sign up for our sister service here), the reinsurer reveals that it is finally pulling back on underwriting of U.S. hurricane risks, which is perhaps the best sign that the market is reaching (perhaps even reached) its pricing floor and that there is now so little margin even the large, globally diversified players are having to reduce their appetites.

That’s a positive for the reinsurance market and for the insurance-linked securities (ILS) sector, as Swiss Re has been taking large chunks of Florida programs in recent years, sometimes at pricing levels that have been tough to compete with.

The company notes in its results this morning that; “The price environment for property and casualty reinsurance continued to be challenging, with continued price erosion in property. Therefore, Swiss Re has reduced natural catastrophe capacity in specific segments, including US hurricane. Even though abundant capital continues to pressure rates, it does so to a much lesser extent than previously.”

Of course, one of the reasons abundant capital is pressuring the market less is that pricing has reached a point where markets are pulling back, moderating pricing and appetite, both on the traditional and alternative side.

Swiss Re it seems is now joining this trend. After all, there is little point chasing pricing down when others already feel the bottom has been reached.

The reinsurers results were marred by the major losses, as you’d expect, with $220m of losses from the Fort McMurray, Canada wildfires particularly notable and a couple of major casualty losses manifesting within Swiss Re’s Corporate Solutions business.

As a result of the catastrophe loss experience, the combined ratio in Swiss Re’s P&C Reinsurance division hit its highest level since 2013, with a 101% combined for Q2 2016 indicating a small technical underwriting loss of $42m (although net income was reported as $283m, down from $461m in Q2 2015).

The Corporate Solutions division, where Swiss Re underwrites large and complex corporate risk transfer transactions, actually saw a net loss of $25m with a combined ratio of 112.7%, compared to a profit of $76m a year earlier. The reason for this was two large casualty type losses from the second half of 2015 that were only reported in Q2 2016.

Overall though, and demonstrating the benefits of diversification and a broad business platform, Swiss Re reported $637m of net income across the group, down from $820m a year earlier but beating most analysts expectations.

Life Capital, the unit where Admin Re sits, reported a particularly good quarter, which will help Swiss Re if indeed it does seek a third-party injection of capital to this side of its business, as was reported recently.

Swiss Re’s new Group Chief Executive Officer, Christian Mumenthaler, commented; “We have a solid result for the first half 2016 despite a challenging second quarter that was marked by a difficult macroeconomic environment as well as more pronounced natural catastrophe losses and large reported claims in our Corporate Solutions Business Unit. The overall picture confirms the strength of our brand, while demonstrating our outstanding client access. These attributes and the focus on underwriting discipline together with our excellent capitalisation will help us navigate, and potentially benefit from, the turbulent times.”

The topic of underwriting discipline or otherwise, is raised frequently in the market right now, with respect to some of the largest companies, as deploying capacity continues to be a priority for some of them. Today’s results show that Swiss Re remains expansive and is growing its business, despite the soft pricing.

At the July reinsurance renewal Swiss Re deployed 10% more premium into treaties than a year earlier, with treaty premium volume now up 18% for the year to date. The company said that this is driven by large and tailored transactions, which are up 76% between January and July, while what Swiss Re terms “flow business” is actually down 7%.

Analysts and shareholders have expressed some consternation about the continued expansive nature of Swiss Re’s ambitions, with some bemoaning the fact capital has not been returned to investors instead.

However, the focus on large, tailored transactions is a unique differentiator for large reinsurance firms like Swiss Re and this is one area they can excel. If the opportunities are there to acquire new business then Swiss Re is choosing to plough ahead, even though pricing may not always be as conducive as it would like. That positions the firm with a growing portfolio that would benefit significantly from any turn in reinsurance market pricing, and the type of business underwritten will insulate the company from a prolonged soft market and flattening of the pricing cycle as well.

So disciplined or otherwise, the strategy is a fascinating one, as it also positions Swiss Re as a very specialist reinsurer, which could in time reduce some of its focus on the more mainstream and vanilla side of reinsurance, especially if the soft cycle remains in place.

All in, Swiss Re’s results appear a solid mix, with some negatives hurting the P&C reinsurance and Corporate Solutions side, but with the diverse business mix, global footprint and large investment portfolio helping it to report a very profitable group result.

You can read the full results from Swiss Re here.

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