Swiss Re sees pricing opportunities (but not enough for all its excess capital)

Global reinsurance player Swiss Re reported its third-quarter results today, revealing a net loss of $468 million for the first nine months of 2017, as well as an ambition to take advantage of improved pricing, although perhaps not enough improvement as it still intends to return excess capital.

One of the problems in the reinsurance industry over the last few years has been this excess capital and while reinsurers might try to tell you it is alternative capital and ILS that has pressured the market, reinsurers own stash of cash has also been weighing down on rates and pricing just as much.

CEO of Swiss Re Christian Mumenthaler explained the opportunities for the reinsurance firm and the reinsurance industry as a whole, in the wake of recent catastrophe losses.

“The entire re/insurance industry is now required to demonstrate its critical role and responsibility subsequent to the tragic natural catastrophes of the recent months,” he said.

“In my view, many lines of business have been operating in an unsustainable environment,” he continued, adding that, “We expect pricing conditions to improve going forward – not only in reinsurance but also in commercial insurance.”

These opportunities are being clearly communicated by the majority of the senior leadership of reinsurance firms, as well as by most ILS fund managers who also see an opportunity to provide higher returns to their investors due to rising pricing and rates.

“We are strongly positioned to work with our partners to capture market opportunities when they arise – as they often do after such events – and continue to tackle protection gaps around the world,” the CEO stated.

Mumenthaler also said that he believes the reinsurers has, “The financial strength to respond to potential market developments.”

In fact it seems Swiss Re has too much financial strength, as it intends to return another CHF 1 billion to shareholders in the form of a fresh round of share buy-backs, preferring to return capacity rather than take advantage of the opportunity to recoup some market share that it has lost in peak catastrophe zones.

This could mean that Swiss Re is not convinced pricing is going to increase that much that it can find sufficient volumes of attractive opportunities to deploy this excess capital. Or it could mean that the reinsurer fears what might happen if it put all of its firepower to work at renewals, as this could be a dampener of rate rises.

Other companies are holding back on returning capital, as they see opportunities to enhance their portfolio (like Lancashire) and provide better returns to shareholders or third-party investors, but Swiss Re continues to feel that returning it is the best route to enhancing its value.

Is capital return the best strategy right now, in the hopes of not flooding the reinsurance market with capacity and sustaining better pricing for as long as is possible?

Or would the better strategy be deployment of this excess capital, in order to secure the biggest portfolio at whatever increased rate level the January renewal offers?

Hard to say, but if the big reinsurers continue to offer cash-back, over underwriting more business, there are plenty of smaller reinsurers and ILS fund managers that stand to benefit, if there’s less capacity from the major reinsurers in the market than there could have been.

This could have been the opportunity for major reinsurers like Swiss Re to double-down and deploy more capital, securing an enlarged share of the market.

But if, deep down, the reinsurers understand that price rises are likely to be short-lived, then perhaps maintaining the disciplined strategy of returning capital for now while the market opportunity is assessed will prove to be the more prudent.

Swiss Re’s full results can be read here.