Swiss Re signals growing role for alternative capital & ILS in its business

Global reinsurance firm Swiss Re is targeting further growth and diversification within its portfolio of natural catastrophe risks, with investor-backed alternative sources of capital set to play an increasingly important and supportive role.

In announcing its strategy and targets in time for its investors’ day today, Swiss Re has revealed an ambition to achieve further profitable growth, a desire to be research and development (R&D) led in its ongoing expansion, to return its Corporate Solutions business to full profitability, and to increasingly leverage third-party capital to complement its own balance-sheet.

Group Chief Executive Officer of Swiss Re, Christian Mumenthaler, explained the strategy, “Swiss Re’s strategy is centred around diversifying our access to risk pools by leveraging our risk knowledge, unique client access and capital strength. We are winning an increasing proportion of reinsurance business through our capabilities in underwriting large transactions and providing innovative solutions. We are investing in research and technology to give us an edge in accessing growing risk pools, such as natural catastrophe, and drive forward our Corporate Solutions and Life Capital businesses. The Group’s superior capital strength allows us to capture such opportunities and maintain attractive shareholder returns.”

Swiss Re sees reinsurance as its foundation still, despite the clear and increasing sourcing of risks from further up the front of the value-chain, as well as through its direct origination.

Importantly though and this goes a long way towards explaining the increasingly positive outlook and desire for reinsurance growth, Swiss Re says its reinsurance unit has “increasing earnings power,” reflecting the improving market conditions and the firms desire to capitalise on them.

Swiss Re intends to monetise its internal resources, as it continues to expand its footprint and attempt to increase profitability, with R&D a key driver.

The company is currently running 80 R&D programs staffed by 450 dedicated FTEs and backed by investments of around US $300 million per-year in its key technology projects.

“The aim is to strengthen Swiss Re’s proprietary risk knowledge and to advance its capabilities to enter new risk pools, compete and advise,” the company explained.

But it’s also about finding innovative ways to source risk as directly as possible and Swiss Re mentions here its iptiQ digital platform, which it calls B2B2C and enables it to white-label the Swiss Re balance-sheet for third-parties that can originate risk.

As well as sourcing risk more directly and from the front of the value-chain, Swiss Re recognises the opportunity now to expand its reinsurance book, in particular in catastrophe lines of business.

Reinsurance remains a key profit driver for the company and in recent years this has been particularly driven by its Transactions business, that provides larger, capital and earnings volatility protection or relief type solutions for clients.

The other area of growth has been in Solutions, which has seen Swiss Re begin the process of unbundling the expertise embedded in its reinsurance offering, to provide solutions that aim to help clients grow and increase their profitability.

This Solutions focus is another sign of companies at the reinsurance end of the value-chain looking to increase the stickiness of their client relationships and also shows an area where large, global reinsurers and the major brokers are set to increasingly compete, as expertise-driven value-add becomes as important capacity and the transaction in many cases.

As the reinsurance product of capacity and its placement plus syndication become increasingly commoditised, this unbundling and increasing focus on owning the client relationship will be a key dynamic to watch over the next few years.

Swiss Re said that 30% of its reinsurance unit profit comes via the large Transactions business (which also require engagement and solutions to deliver), while it now partners with 25% of its clients on Solutions, up from 15% just two years ago. Expect this to accelerate from here, as a key route through which Swiss Re and its competitors can drive client loyalty, satisfaction and stickiness.

Part of the ability to own the client relationship also has to be driven by having enough options for the client to tap into, among which sits access to third-party capital and the capital markets.

Swiss Re has had its access to capital markets and insurance-linked securities (ILS) for years, but largely as a form of retrocession and in terms of offering its capital markets expertise to structure, manager and run the book on large securitisations of re/insurance risks, such as catastrophe bonds.

Increasingly, Swiss Re is looking to bring third-party capital more closely within its business, to leverage it for growth in natural catastrophe exposures and to partner with investors to help them generate the risk-linked and relatively uncorrelated returns they seek.

Swiss Re is targeting a carefully steered portfolio growth strategy in reinsurance, saying that “Based on expected loss trends, pricing outlook and risk management, the Business Unit is expanding its natural catastrophe franchise, while managing exposure in casualty reinsurance.”

Swiss Re expects that its targeting growth in catastrophe reinsurance will have a positive effect on its earnings.

The company expects the natural catastrophe reinsurance market will grow to roughly US $40 billion over the next four years, from the US $30 billion it estimates it to be today, providing an opportunity for growth into an area of the market the company says delivers attractive returns due to the use of its proprietary risk knowledge and diversification benefits it brings to the portfolio.

Highlighting the importance of the capital markets in this strategy to grow in catastrophe underwriting, Swiss Re highlights the recent formation of its Alternative Capital Partners business unit.

The unit sits in Group Finance and brought together Swiss Re’s insurance-linked securities (ILS) capabilities, with its retrocession and syndication teams.

The new group will leverage a “broad range of third-party capital vehicles” to help the Swiss Re reinsurance division grow its natural catastrophe book, while keeping exposures within risk limits.

Just in recent months we’ve reported that Swiss Re used an increased amount of third-party capital at renewals this year to support its natural catastrophe reinsurance exposures.

As a result of which and thanks also to increased use of retrocession, the reinsurer ceded roughly 4% more of its catastrophe risk exposure to sources of retrocession, compared to the prior year.

Also noteworthy is the fact that Swiss Re returned to the catastrophe bond market as a sponsor for the first time in some years in 2019, while the firm is also planning to increase the use of its Sector Re sidecar as well.

The firm said this morning that Alternative Capital Partners will follow a “differentiated partnership approach,” providing third-party investors with a way to align themselves with Swiss Re’s underwriting views.

Group Chief Financial Officer John Dacey explained, “The establishment of Alternative Capital Partners enhances our already flexible capital structure. It allows us to consider all sources of capital holistically.”

It is noteworthy that Swiss Re has raised the profile of its ILS and alternative reinsurance capital usage at its key investors’ day today.

Swiss Re has long been a user of alternative capital and a service provider to those seeking to access it, but the company has clearly become more open to a partnership type approach with investors.

Openly saying that the reinsurer will target growth with the support of third-party capital seems a new and more open approach to alternative capital, as Swiss Re brings its strategy more into line with some of the reinsurers that have already deeply embedded alternative capital within their business models.

Of course, alignment is a question some investors will want to hear robust answers to, as they do when working with any reinsurance firm. But there is no doubting that aligning themselves with a firm that has the global reach and deep expertise of Swiss Re will prove very attractive to some.