Swiss Re forecasts higher rates after catastrophes hit 2018 results

Global reinsurance giant Swiss Re is forecasting improving rate conditions across insurance and reinsurance business after its results were dented by catastrophe losses in property and casualty lines and its commercial underwriting arm.

Swiss Re reported its full-year 2018 results today, suffering technical underwriting losses across its P&C reinsurance arm and Corporate Solutions unit thanks to the impacts of catastrophe loss events.

Swiss Re’s P&C reinsurance unit reported positive net income of $370 million, but was hit by $2.3 billion of large claims during the year, resulting in a combined ratio of 104% and return on equity (RoE) of 3.7%.

However, the company said it maintains its underwriting discipline here and didn’t grow the book over the course of 2018, writing gross premiums of $16.5 billion.

The Corporate Solutions division suffered much more in 2018 though, falling to a net loss of $405 million on the back of estimated large claims amounting to $0.7 billion. The end result for the commercial insurance underwriting arm was a combined ratio of 117.5% and a negative RoE of -19.4% for full-year 2018.

In Corporate Solutions Swiss Re continues to expand, adding 13.6% of gross premiums in 2018, to reach $4.6 billion underwritten during the period.

The company experienced a 3% rate increase in the Corporate Solutions unit in 2018, but says rates still remain insufficient. Swiss Re said that in this unit it will continue to “take targeted actions to address past performance and price deficiencies” in an attempt to improve performance.

Overall though, Swiss Re delivered improved results year-on-year, with full-year 2018 net income reaching $421 million, up from $331 million in 2017 and that includes factoring U.S. GAAP accounting changes that caused an estimated $599 million pre-tax impact, the company said.

A solid result in life and health reinsurance helped, with this unit delivering $761 million of net income for the year, while Life Capital also ticked along nicely with $23 million of net income and $818 million of gross cash generated.

Swiss Re Group Chief Executive Officer, Christian Mumenthaler, commented on the results, “There was no respite from large nat cat events and man-made disasters in 2018. Our financial strength enabled us to support our clients in these tough times. It was the second challenging year in a row for the industry and us. Our P&C businesses were heavily impacted by the events. Corporate Solutions’ results were disappointing.”

Group RoE came out at just 1.4% for the year, which is largely aligned with 2017. This despite the fact 2017 saw a much higher level of catastrophes, which just shows the impact that GAAP accounting has had as well as some challenging investment conditions.

The return on investments (ROI) for 2018 was 2.8%, but would have been 3.3% excluding the GAAP accounting method. This compares to an ROI of 3.9% in 2017.

As a result of all of this, common shareholders equity decreased by 16.3% to $27.9 billion after the year, which also reflects capital actions taken.

Group Chief Financial Officer, John Dacey, added, “We fared well in an environment of challenging insurance and investment risks. Our diversified business model helped to mitigate the associated losses. Most important, our capital position and confidence in our long-term sustainable capital generation remain very strong and they support our attractive capital management actions.”

At the January reinsurance renewals Swiss Re underwrote $10 billion of business, a significant increase from the $8.4 billion of its book that was due, an increase of 19%.

The reinsurer cited large transactions and growth in the core business as driving this, with an average price increase of 1% achieved.

Rate increases were most pronounced in the loss-affected property and casualty lines, Swiss Re said and the company forecasts that this will continue.

CEO Mumenthaler explained, “Even in challenging conditions, I am optimistic about Swiss Re’s future. In the January renewals of our P&C Re business, we were able to grow while keeping our running costs flat. We expect further price improvements in the renewals later this year, especially in the loss-affected markets.”

This does bode well for the market as a whole. But as ever, rate increases in some areas of the market are not uniform across the globe and large reinsurers like Swiss Re continue to write business in some regions at rock-bottom pricing to maintain and grow market share.

Catastrophe loss activity and major man-made losses continue to be the main threat to global reinsurers results. In 2018 Swiss Re reported $2.2 billion of major natural catastrophe losses and $800 million of man-made impacts.

It will be interesting to see how the major reinsurers cope when there are really significant catastrophe losses in the regions where, as A.M. Best said, rates are being underwritten at inadequate pricing. That’s a dynamic the market has not yet experienced since the softening of reinsurance accelerated almost a decade ago.

Of course climate risk is now seen as a key factor for future rates and this is driving some nervousness among the major reinsurers, particularly those exposed on both liability and asset side of a re/insurance business, like Swiss Re.

The prospect of more frequent and intense weather or climate catastrophes is driving some urgency to secure risk commensurate rates, at least in some areas of the world.

Commenting on climate risk Mumenthaler said, “At the current rate of action, climate change will likely lead to more natural disasters, with implications for every aspect of society and everyone – not to mention the consequences that could spill over to future generations. It will take a ’whole of society’ approach to limit global warming before time runs out. I’m optimistic that this will be possible, building on the current momentum. At Swiss Re, we make it a priority to continue leading action on climate change and sustainability efforts, both on the asset and liability side of our business, and within and beyond our industry.”

It will be interesting to see whether the major reinsurance firms like Swiss Re try to use their might to push for higher rates and how their competitors respond at the next sets of major renewals this year.