Reinsurance giant Swiss Re has underwritten more business at the key January 2018 reinsurance renewals, in response to rising rates and after a year 2017 which saw the company report $4.7 billion of natural catastrophe losses, but still report positive net income for the year.
Swiss Re, like a number of other major reinsurance firms including competitors Munich Re, SCOR and Hannover Re, has taken advantage of the improved reinsurance rating environment to grow its book of premiums by 8% at the January renewal season.
Swiss Re underwrote $8.1 billion of premiums at 1/1, up from $7.5 billion of premiums at Jan 2017, as the reinsurer capitalised on a rating environment that was improved somewhat, although perhaps not as much as the company and its cohort would have liked, following their major loss experience.
Swiss Re reported its full-year 2017 results this morning, more on that over at our sister site Reinsurance News, delivering a positive net income of $331 million, despite suffering $4.7 billion of natural catastrophe losses during the last year.
But the firms two business that were exposed to the catastrophes, property & casualty reinsurance and Corporate Solutions, both fell to a loss for the year, as their combined ratios were elevated to 111.5% and 133.4% respectively.
Swiss Re’s CEO Christian Mumenthaler, said of the results, “The severe natural disasters of 2017 are not only loss events, they are above all human tragedies and we are deeply moved by the devastation caused. In times like these we demonstrate the critical role re/insurance plays in enabling people and economies to recover. I am proud that Swiss Re, also through our clients, will be supporting people and businesses affected with estimated payouts of USD 4.7 billion. 2017 proved how our strategy to maintain a superior capital position and pursue disciplined underwriting continues to be the right approach.”
The results reflect a reinsurance company that benefits greatly from both geographical and line of business diversification, but analysts have been less impressed, saying that the P&C reinsurance business would have had a combined ratio of around 100% on a normalised basis anyway and Corporate Solutions could have been above 100%.
Both divisions, which are those that retain property catastrophe exposures, suffered net losses thanks to the natural catastrophe events of 2017.
The property and casualty reinsurance business suffered a net loss of $413 million, after it took $3.7 billion of the losses, while the Corporate Solutions division suffered a net loss of $741 million, after taking the other $1 billion of natural catastrophe impacts.
Analysts may well raise questions about whether Swiss Re could have made greater use of retrocession, the capital markets, perhaps even catastrophe bonds, to lessen this burden on its earnings.
Swiss Re has reduced its use of catastrophe bonds as protection to almost nothing, having just one cat bond left outstanding now. At the same time, the firms Sector Re collateralized sidecar series is also not as large as you’d expect for a company of this size and overall its use of insurance-linked securities (ILS) and collateralized retrocession appears lower than some of its smaller competitors.
Greater use of retro and the capital markets may have allowed Swiss Re to retain more of the risk that is less volatile, while shifting some of the peak exposures to third-party capital. In a meaningful way greater use of third-party capital could have actually helped Swiss Re write more of the peak business in recent years, while earning some fees.
But the balancing act between giving away risk premium in return for fees and getting paid for your risk expertise, origination, pricing and structuring, over retaining it and extracting as much value as you can within a diversified portfolio, is a difficult one and a business model that has yet to be perfected by a traditional reinsurer.
Swiss Re has grown its renewal book by 8% at January 1st, from $7.5 billion to now $8.1 billion. A significant uplift, like its competitors, taking advantage of rate rises, but perhaps a number that could have been much higher had the firm been partnering with institutional investor capital to expand more into property catastrophe risks.
Swiss Re reported, “higher rates across all major lines of business and regions and new large transactions,” that drove this growth.
It said that prices increased by 2% at the renewals, with rate increases most pronounced in loss-affected property lines, but more moderate elsewhere. Swiss Re’s measure of risk-adjusted price quality increased to 103% for the underwritten book.
The company noted that the majority of the loss-affected U.S. property underwriting business will come up for renewal later in 2018. It will be interesting to see whether rates encourage Swiss Re to grow more, or perhaps use third-party capital more, or whether its portfolio growth will be similar at around 8% again.
That will all depend on what prices are available, as well as the levels of competition. But with its competitors increasingly leveraging third-party capital to augment their property catastrophe underwriting and to add efficiency to their capacity, Swiss Re may find rates aren’t up as high as it would like come June.
Commenting on the year ahead, Mumenthaler, said, “2017 was clearly a challenging year for the industry – and Swiss Re. However, we believe the outlook for our industry is now more positive than it has been during the last four years. Changes in the market environment, such as adjusting property and casualty price levels and increases in interest rates, are expected to be beneficial for our business.”
Mumenthaler also noted the importance of reinsurance, a key messaging point for the industry these days, saying, “In addition, the catastrophes are a reminder of the relevance of large global re/insurers and their role in tackling the large worldwide insurance protection gap. It visibly shows that the need for insurance is increasing due to developments such as population growth and the concentration of assets in catastrophe-prone regions.”
Finally, it’s important to note that Swiss Re’s net income of $331 million could have been much lower had it not benefited from a one-off disposal of a stake in New China Life, which drove roughly $240 million of the profit last year.
Growth of the underwriting books at major reinsurers has largely been supported by their own capital, as they seek to put excess to work at the first opportunity for higher rates. Will that prove profitable, should catastrophes bite again in 2018? Or might they have found a partnership with alternative capital a more sustainable way to grow? Time will tell.