Swiss Re Insurance-Linked Fund Management

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Low losses help Swiss Re beat expectations, sees price declines slowing


Swiss Re, the second largest reinsurance firm in the world, has benefited from the low-levels of catastrophe losses in the third-quarter which helped it to beat analyst expectations in Q3 despite the continued market challenges.

Similar to its competitor Munich Re, which announced its results yesterday, Swiss Re has had a very good quarter as a number of factors contributed to it beating analysts expectations by quite a margin.

Swiss Re reported net profit of $1.227 billion, which is up 14% on a year earlier from $1.072 billion reported then. Swiss Re beat analysts polls significantly, Reuters poll of analysts came out with an expected figure of $891m while Bloomberg polled 13 analysts who concluded that the figure would be $928.6m. In this case the analysts have missed while the company analysed has surpassed expectations.

Low levels of catastrophe and man-made losses are a contributing factor to the impressive quarterly result for Swiss Re, along with improved performance in a number of business units. The reinsurer reported a return on equity of 14.8% annualised for the quarter compared to 14.3% a year earlier.

Group CFO David Cole commented on the performance; “I’m pleased to report that all Business Units have again delivered a solid performance during the third quarter, contributing to an overall strong Group result. This performance was supported by a lower than expected loss burden from natural catastrophes as well as a continued improvement in the L&H operating margin.”

Group CEO Michel M. Liès added; “Swiss Re’s net income over the first nine months of 2014 is a successful result. We’ve again made good progress towards our financial targets and we’ve closed significant deals that show we can provide our clients with smart risk transfer solutions. This result is proof that going the extra mile for our clients pays off, especially as the markets continue to be soft and economic conditions seem to become more uncertain.”

Swiss Re continues to adjust its business mix, like so many other reinsurers, with a greater focus on complex solutions for large clients, as well as developing new analytics solutions to assist it in core areas of the business.

In P&C reinsurance, Swiss Re reported income of $842m and premiums earned of $4.305 billion, compared to $784m and $3.951 billion in 2013. The combined ratio assisted by low loss experience helped, coming in at 76.7% in 2014, compared to 81.5% in 2013. Worth noting though is that return on equity in P&C reinsurance was actually down, despite the stronger performance, at 28% versus 28.6% in 2013.

In life and health reinsurance Swiss Re reported income of the quarter of $160m, up from just $35m a year earlier. The reinsurers Corporate Solutions unit also reported increased income, at $102m compared to $71m a year earlier. Admin Re reported a drop in income to $54m from $151m as effects of the restructuring of this area of the business flowed through.

Swiss Re believes it remains on track to meet its long-term targets and expects to benefit from opportunities to grow in high-growth markets, where it expects that the long-term increase in demand will outweigh the current supply pressures in the market. That would be a positive for all reinsurers if they can just tap into this demand and create products to target emerging economies.

“We understand that there is uncertainty in the market and challenges undoubtedly do exist. As a result, rigorous cycle management, portfolio steering and underwriting discipline will remain our main tools to be able to generate success going forward. We will remain firmly focused on profitable growth, while making sure we support our clients so they can pursue profitable opportunities,” said Group CEO Michel M. Liès.

Interestingly, the results statement and shareholders letter make little mention of market conditions. Swiss Re has in the last six months been quite outspoken about alternative capital and insurance-linked securities (ILS), having regularly raised the topic of investors commitment to the market. But this tone has once again softened a little more as the reinsurer seeks to focus on its own success rather than the issues facing it.

Swiss Re acknowledges that rates in property catastrophe reinsurance business have been under pressure since June 2013, both due to the lack of catastrophes and the high-levels of capital in the marketplace, both traditional and alternative.

CFO David Cole briefly mentioned alternative capital during the firms media call this morning. He said that there wasn’t a lot that is new to talk about since Monte Carlo. Alternative capital continues to be in the marketplace, he said, but there seems to have been a moderation of pricing levels since Q2.

The reinsurance market continues to have a high-level of excess capacity, some from these new capital providers Cole said, but more due to the benign loss experience and highly capitalised traditional balance sheets.

Cole said that Swiss Re has an expectation that pressure will likely continue in the reinsurance market, but with perhaps a bit of a slow down in the pace of pricing developments. This is aligned with the thoughts of many other reinsurers, such as Hannover Re, as well as ILS investors who feel that there is not much room for further price declines in property catastrophe business.

The evidence of a potential slow-down in price declines is perhaps helped by today’s news that one of the recent catastrophe bonds to launch, Kilimanjaro Re 2014-2, looks set to price at the mid-point of guidance. This perhaps shows that ILS investors are ever nearer to establishing a floor on pricing, below which they will not go.

However, if the floor is established at levels which reinsurers find hard to compete with, or at least to compete with over the long-term, that could still spell trouble for large reinsurance operations who may find they have to relinquish some areas of the market to ILS and catastrophe bond solutions.

It’s also worth noting that Swiss Re is itself structuring and running the book for one of the latest cat bonds, the Ursa Re 2014-1 deal.

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