Swiss Re to remain a major ILS & alternative capital player: CFO Dacey

Having brought together its insurance-linked securities (ILS) and retrocessional reinsurance activities last year, global firm Swiss Re expects to remain a major player in the alternative capital space, its CFO said yesterday.

Swiss Re reorganised its insurance-linked securities (ILS) and retrocessional capabilities in 2019, merging its ILS and retro teams within a new, distinct unit named Alternative Capital Partners (ACP).

Since then, the reinsurer has been expanding its use of third-party capital, within its Sector Re collateralised reinsurance sidecar vehicle and its growing Matterhorn Re catastrophe bond program.

Part of the reason for this increase in use of third-party capital at Swiss Re has been a resurgent appetite for natural catastrophe risk at the reinsurance firm.

After a number of years where Swiss Re had shrunk its catastrophe risk appetite, the company had begun to increase it in 2019, in-line with the improving rate environment, but has been carefully increasing its use of retrocession and third-party capital at the same time to manage volatility.

Speaking to the media after announcing the reinsurers results yesterday, CFO of Swiss Re John Dacey reflected on the evolving strategy in this area of Swiss Re’s business.

“We announced last year the bringing together of resources under the heading of Alternative Capital Partners and I’m pleased that we’ve been able to demonstrate real success coming through that,” he began.

Adding, “The first key issue is that as we expand our P&C Re business and opportunities around nat cat, we run into some very large peak risks. Windstorm in North America is the largest at the moment.

“There is some absolute amount we are going to be uncomfortable with and what we are able to do is continuing servicing clients, but retrocede some of that to those happy sharing that risk with Swiss Re.”

With Swiss Re now having a range of vehicles at its disposal to tap into capital market appetites, the reinsurance firm is able to offer third-party investors a range of different risk and return opportunities as well.

Dacey noted, “Whether it be through our sidecar, cat bonds, or other capital market driven alternatives to share that risk, it works very well as long as we are not developing specific risks for that channel.”

That refers to not overexposing any specific source of investor income to the risk in Swiss Re’s growing catastrophe book, which is why the reinsurer will likely continue to develop multiple access points for investors to participate in its underwriting returns.

Already, Swiss Re took its quota share sidecar Sector Re to around $1.1 billion in size in the final quarter of 2019. That vehicle could well be larger now, after the January renewals.

In addition, Swiss Re has now brought three catastrophe bonds to market using its Matterhorn Re Ltd. issuance vehicle, two of which were in 2020.

That shows the company reacting to market conditions to tap into the available capital sources and investor appetite, aware that its internal capabilities to structure and issue cat bonds makes that market a very attractive source of retro reinsurance at this time.

We’re likely to see a growing Sector Re sidecar and more Matterhorn Re cat bonds, as the reinsurers appetite for catastrophe exposure continues to grow.

With rates set to increase again in April in Japan and at the Florida and United States mid-year reinsurance renewals, we will likely see Swiss Re continue to leverage third-party capital to become more expansive at these junctures as well.

“We remain a major player in this marketplace and expect to continue to be,” Dacey confirmed.