Global reinsurance firm Swiss Re is watching for potential opportunities in the retrocession market as this segment reacts to repeated losses and issues with trapped collateral, that the reinsurer believes may attract investors to work more closely with it.
Swiss Re already cedes a portion of its property catastrophe risks to capital market investors through its long-standing retrocession sidecar arrangements under the Sector Re name.
As we explained after the mid-year renewals, Swiss Re used an increased amount of third-party capital this year to support its natural catastrophe reinsurance exposures, which alongside increased use of retrocession meant that the reinsurer ceded roughly 4% more of its catastrophe risks to sources of retrocession, compared to the prior year.
In addition, the reinsurer has also used catastrophe bonds as a way to cede risk to investors over the years, returning to the cat bond market after a hiatus of a number of years in 2019.
So the capital markets are certainly open to Swiss Re and as a result the reinsurance firm looks set to take greater advantage of investor appetite as it grows its own property catastrophe book.
Speaking today, after the reinsurers third-quarter results were announced, the firms CFO John Dacey discussed the opportunity that now presents itself to Swiss Re.
Commenting on the state of the retro market and what this means to Swiss Re, Dacey explained, “There have been a number of investors in the space that have been frustrated by the frequency and the scale of the losses, as well as the continued requirement that collateral is held until the claim evolves.
“This creep seems to have been under-communicated to investors and I think you’ll see a response as they work out who to work with.”
Which Dacey believes presents an opportunity for Swiss Re to work even more closely with the capital markets, something that will please investors in the firms retro reinsurance sidecar Sector Re, as well as cat bond funds and investors that would lap up any additional issuance from the firm.
“For Swiss Re this is positive,” Dacey continued. “We cede risk to the market on a proportional bass, with no selection risk where we might keep all the good ones and have ceded the others.
“We are completely aligned with those investing in the retro market,” he said referring to Sector Re.
“We expect to continue to have access to the capital market,” he explained, adding that, “As we grow the nat cat portfolio there may be more of a chance to use retro to manage some of those peak exposure and we’ve got a team in place to manage that as we go into 2020.”
Swiss Re brought together its insurance-linked securities (ILS) and retrocessional capabilities earlier this year, merging ILS and retro within one new unit named Alternative Capital Partners (ACP).
That move may prove particularly well-timed, as the dislocation of the retrocession market may make Swiss Re an increasingly attractive source of risk for investors looking for proportional or quota share investments, as well as for cat bond investors.
Rising traditional retro and potentially reinsurance costs may also make the capital markets an increasingly cost-effective option for Swiss Re, as having its own capabilities to structure and cede out some of its risk to investors means it can access alternative capital very efficiently.
Commenting specifically on the use of the Sector Re sidecar during an analyst call this afternoon, Dacey explained that it’s playing an increasingly important role as Swiss Re grows its property catastrophe book out in better market pricing conditions.
But it’s clearly not just about hoovering up risk to offload to investors and earn a fee, Swiss Re still intends to retain the lions share.
“In 2019 we’ve close to doubled the retro for certain exposures through our Sector Re sidecar,” Dacey explained.
Adding, “We believe we have the ability to work closely with the investor community to be able to manage off our balance-sheet some of the risk, while retaining the vast majority of it going forward. The enhanced use of specific retro on some of these peak risks will allow us to write profitable business going forward.”
It suggests that the Sector Re sidecar will play an increasing role through the coming renewals in 2020, perhaps growing to an even larger size as a result.
Swiss Re had grown Sector Re to roughly $670 million in time for the mid-year renewals this year, further expansion of the vehicle may be ahead if market conditions remain conducive for it to continue growing its catastrophe reinsurance book.
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