Swiss Re Insurance-Linked Fund Management

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Swiss Re reports P&C underwriting loss, as catastrophe growth continues


Global reinsurance giant Swiss Re reported a higher Property & Casualty combined ratio for full-year 2019 than the prior year, as its P&C Re division fell to a technical underwriting loss on the back of major losses. But growth has continued, as the company expands further into catastrophe risks at the 2020 renewals.

swiss-re-building-imageThe year 2019 was a far more profitable one for Swiss Re though, as the reinsurance firm reported group net income rose 73% to $727 million, up from $421 million in 2018.

In fact, Property & Casualty Reinsurance (P&C Re) net income rose 7% in the year, to reach $396 million, with net premiums earned rising 20%, driving a return on equity (ROE) of 4.4%.

But profit in the P&C reinsurance unit was hurt by the high levels of catastrophe and major man-made loss activity during the year, with $2.7 billion in large losses suffered in 2019 due to natural catastrophes and man-made events, as well as by increased claims from Swiss Re’s US casualty business.

Natural catastrophe and man-made losses reached $2.3 billion during the year, driven by typhoons Hagibis and Faxai in Japan, hurricane Dorian in the Atlantic and wildfires, floods and hailstorms in Australia, the reinsurer said this morning.

Loss creep from 2018’s typhoon Jebi also dented the P&C reinsurance result during 2019, as well as man-made losses that included the Ethiopian Airlines crash and the subsequent grounding of the Boeing 737 MAX fleet.

As a result of the heavy loss activity in 2019, Swiss Re’s P&C reinsurance unit has reported a combined ratio of 107.8% in 2019, denoting an underwriting loss for the year.

In fact, the combined ratio was actually higher than a year earlier, as in 2018 Swiss Re reported it as being 104.0%.

On a normalised basis though, so factoring in a normal year of catastrophe losses and excluding prior year development and the impact of an adverse development cover between P&C Re and the Corporate Solutions division, Swiss Re said the combined ratio was in line with previous estimates and it forecasts an improvement to 97% for 2020.

The Corporate Solutions division, where large commercial risk underwriting takes place, has fallen to another loss for the year, reporting a net loss of -$647 million and a combined ratio of 127.9%.

The adverse development cover between it and Swiss Re’s P&C reinsurance unit could be a significant driver of the higher combined ratio in 2019.

Denting Corporate Solutions was the underwriting actions taken at the middle of 2019, as well as large and medium-sized claims, mainly from prior accident years related to the recent deterioration in the US casualty business, Swiss Re said.

Swiss Re Group Chief Executive Officer Christian Mumenthaler commented on the results, “Our 2019 results were impacted by heavy natural catastrophe losses, our decisive management actions to reposition Corporate Solutions and increased claims in US casualty. We are taking proactive measures to put us at the forefront of adverse trends. On the other hand, we delivered an excellent investment result and strong performance in L&H Re, demonstrating the power of our diversified business model. We achieved a key strategic milestone with the agreement to sell ReAssure. And we are starting 2020 with an improved quality of our portfolio, underpinned by strong January renewals and pricing momentum.”

Swiss Re Group Chief Financial Officer John Dacey added, “Despite significant loss events in 2019, Swiss Re maintains its very strong capital position and continued reserve adequacy. P&C Re matched strong growth with rigorous expense discipline, Corporate Solutions also improved its expense ratio, and L&H Re continues to deliver robust performance. The strength of our business model allows us to continue to offer an attractive dividend bolstered by a public share buyback programme.”

Swiss Re has continued its growth into catastrophe and P&C reinsurance lines at the January 2020 renewals, reporting premium volume as having risen 2% thanks to growth in its property business that was partly offset by a reduction in casualty lines underwriting.

Swiss Re continues to reposition itself again to fit in with the reinsurance market cycle and this growth into property and catastrophe business is a key driver of the companies expanding use of third-party capital and catastrophe bonds.

The company said that reinsurance contracts worth $10 billion in premium volume were renewed on 1st January 2020, a 2% volume increase compared with 2019.

Swiss Re said that this growth was “particularly in the natural catastrophe book,” further underscoring the expected continued need for flexible capital to help the reinsurer hedge out its growing peak catastrophe exposures.

The company said it achieved a 5% nominal price increase across its renewal book, while risk-adjusted price quality was unchanged, due to lower interest rates and more conservative loss assumptions.

Looking ahead, Swiss Re’s growing book of P&C risks should begin to deliver based on the higher pricing it will have achieved at renewals over the last year or so.

Catastrophe related business could be a key driver of future profits now, with Swiss Re also set to increase its earning of fee income due to the business it cedes to third-party capital using its Sector Re sidecar and other arrangements as well.

Access to insurance-linked securities (ILS) capital could become one major lever for the company as it moves through 2020, providing both a moderating buffer on volatility if significant losses occur, as well as a source of fee income.

In addition, as can be seen in this latest set of annual results, having a large and globally diversified business means Swiss Re can already absorb significant loss impacts on its own.

If it can get the hedging and use of third-party capital just right, as a way to add elasticity to its own balance-sheet capital while removing volatility from its results, we could see continued growth as the company takes full advantage of this new approach to managing its exposure and capital more holistically.

Group CEO Mumenthaler commented on the year ahead, “Moving into 2020, we remain firmly committed to building resilience for our clients, communities and governments as they face significant and wide-ranging challenges. We will focus on completing the sale of ReAssure and improving the performance of Corporate Solutions through active portfolio pruning and rate increases. We remain confident in our ability to proactively address new industry developments and capture business opportunities while maintaining attractive shareholder returns.”

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