Swiss Re P&C unit falls to underwriting loss on cats & large losses

Swiss Re’s property and casualty reinsurance underwriting division fell to a technical underwriting loss as large losses and catastrophe events dented its results over the first nine months of the year.

Swiss Re has reported solid overall performance with group net income reaching $1.3 billion for the first nine months of 2019, up from $1.1 billion for the same period of 2018.

Property & Casualty Reinsurance (P&C Re) net income rose by 39% year-on-year, to $880 million, with a return on equity (RoE) of 11.8%, but the combined ratio for this division was 101.4%, reflecting a technical underwriting loss for the year so far.

Swiss Re’s Life & Health Reinsurance (L&H Re) unit also delivered strong net income, reporting a $651 million result and an RoE of 11.8% for the period.

The Corporate Solutions division is a little harder to unpick, having reported a net loss of $441 million for the year so far, but with Swiss Re saying that “decisive management actions” as well as the impact of large catastrophe losses, especially hurricane Dorian, drove this segment to another loss.

Finally, Swiss Re’s Life Capital unit managed net income of $40 million, but generated positive gross cash amounting to an impressive $831 million, which Swiss Re noted was due to exceptional items.

The main reason that P&C Reinsurance could deliver positive net income is down to the investment result, with Swiss Re reporting an impressive 4.3% return on investments and a 2.9% running yield.

This was down to equity market performance, fixed income gains and the benefit of a one-off for the sale of Swiss Re’s stake in Brazilian insurance group SulAmérica S.A. Overall Group RoE was 6% for the first-nine months.

Swiss Re has grown its reinsurance book significantly in 2019, particularly in P&C Re, which has helped to drive its premiums earned and fee income up by any impressive 10% year-on-year to $28.4 billion.

But in total Swiss Re recorded $1.7 billion of large claims from natural catastrophes and man-made losses, much of which came during the third-quarter of the year, thanks to hurricane Dorian, typhoon Faxai and some man-made loss impacts.

Commenting on the year so far, Swiss Re’s Group Chief Executive Officer Christian Mumenthaler explained, “The strength of our business with its global reach, diversification and very strong capitalisation enabled us to react fast and support our clients and their customers affected by the large natural catastrophes and man-made events in the first nine months.

“Our Reinsurance Business Unit achieved profitable growth in a challenging market environment. The transformation of Corporate Solutions is underway, and we continue to benefit from robust gross cash generation in Life Capital. Our leading market position and positive rate dynamics year to date give us confidence for the upcoming renewal season.”

On the financial side of the business, Swiss Re has today cancelled its next tranche of the public share buy-back programme, saying that this is due to strong capital deployment into new business, as well as significant natural catastrophe losses and the suspension of the initial public offering of its ReAssure closed life operation.

Capital deployment has helped to drive strong premium growth for Swiss Re, which will drive future profits, but the catastrophes alongside this have perhaps dented its capital base to the degree that a further return of capital to shareholders is less appealing. It remains to be seen how the shares respond today to this.

Swiss Re’s Group Chief Financial Officer John Dacey commented, “The Group’s results in the first nine months underline the strength of our franchise. Despite multiple large natural catastrophe and man-made claims affecting the business, our capital position remains very strong, allowing us to take advantage of growth opportunities in an improving pricing environment.”

In P&C reinsurance, Swiss Re said that its net premiums earned increased 17% to $14.2 billion, driven by capital deployment into large transactions and growth in natural catastrophe business.

While the combined ratio was 101.4%, Swiss Re still forecasts that its P&C Re unit is on track to achieve a normalised combined ratio of 98% in 2019. However it will be key to see how large the loss from typhoon Hagibis is in achieving this and reserve releases could prove necessary to achieve technical underwriting profitability, it would seem.

In P&C, the $1.1 billion of large claims included $460 million from Typhoon Faxai in Japan and roughly $300 million from Hurricane Dorian in the Atlantic.

Swiss Re puts the total insured market losses for typhoon Faxai at roughly $7 billion for Typhoon Faxai and around $4.5 billion for Hurricane Dorian.

In addition, large man-made loss events totalled around $310 million, including impacts from the Ethiopian Airlines crash and grounding of the Boeing 737 MAX fleet, as well as the compulsory liquidation of Thomas Cook.

In addition, loss creep from 2018’s typhoon Jebi has also hit Swiss Re during the period, which the reinsurer said was “in line with a material increase in the total market loss.”

As we explained yesterday, it looks remarkably like the more recent typhoon Hagibis could drive an industry loss of as much as 70% greater than Faxai, which on Swiss Re’s estimate of $7 billion for Faxai would suggest that typhoon Hagibis could in the end cause $12 billion or more of industry impact.

The Swiss Re Corporate Solutions combined ratio came out at 127% for the first-nine months, as the imapct of management actions flowed through as well as large catastrophes and losses.

Man-made and natural catastrophe losses were around $290 million for the nine-months, which Swiss Re said includes “significant claims from Hurricane Dorian” and the compulsory liquidation of Thomas Cook.

However, Corporate Solutions continues to grow, with net premiums earned rising 7.6% to $3.1 billion, thanks to property and credit lines growth and rate increases.

On pricing in the commercial book, Swiss Re notes that it, “Expects the positive momentum in commercial insurance rates to continue after achieving a broad-based 10% price quality increase in the first nine months of 2019.”

2019 has proven challenging, despite the fact so far natural catastrophe losses remain much lower than the prior year. But the continued impact of 2018 events including Jebi dented the start of the year and losses through the rest have now been sufficient to erode technical underwriting profits.

“So far in 2019 we have seen severe storms in both the Atlantic and the Pacific, causing heavy damage to local communities. Our deepest sympathies go to all those affected by disasters. They act as a constant reminder of the need to have access to effective insurance protection around the world,” CEO Mumenthaler commented. “We continue to focus on fostering partnerships to develop affordable, innovative, technology-based solutions that help close protection gaps, leverage our risk expertise and tap into new sources of growth.”

Whether the catastrophe loss activity will have eroded any of Swiss Re’s third-party capitalised sidecar series Sector Re is at this stage uncertain, but it is likely that some losses will have flowed to the 2019 issues from the sidecar, at least through Faxai, perhaps from Dorian as well, while Hagibis (as a much larger loss) is almost certain to eat into some of that third-party capital even further.