Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Swiss Re uses more third-party capital to back nat cat expansion


Global reinsurance giant Swiss Re has returned more meaningfully to the capital markets and insurance-linked securities (ILS) in 2019, reported by the firm as a “significantly increased use of third party capital” used to back what looks like significant growth in catastrophe exposures underwritten.

swiss-re-building-logo-newAn expanded reinsurance business was one of the items we highlighted this morning, when reporting on Swiss Re’s first-half 2019 results.

Overall, Swiss Re has increased its Group natural catastrophe risk exposure by around 30%, just across the core perils of U.S. and Atlantic hurricane, California earthquakes, European windstorm risk and Japanese quake.

In tropical cyclone and hurricane risks in the North Atlantic, Swiss Re said that its growth back into property catastrophe markets this year has helped to increase the value at risk it holds, after retrocession, by almost 40%.

The reinsurers exposure to California earthquake is up almost 52%, Japanese earthquake is up 7% and European windstorm up 9%.

Swiss Re said that capital deployed into its property and casualty reinsurance business has significant increased, as it sought to take advantage of improvements in the pricing environment at what it terms “successful renewals.”

Following these renewals, the firm said that its natural catastrophe risk exposure is now back at 2015 levels, adding that this expansion at attractive pricing levels if expected to drive improved earnings in the P&C Reinsurance business for Swiss Re.

Overall, Swiss Re said that natural catastrophe reinsurance premiums written grew by 17% overall in the first-half, with economic capital deployed into non-proportional nat cat business up a huge 41%.

But it wasn’t only Swiss Re’s money being put to work in this expansion back into property catastrophe reinsurance, Swiss Re has also increased its use of third-party capital from the insurance-linked securities (ILS) market in 2019 as well.

The firm cites a “significantly increased use of third party capital to back nat cat growth” so far this year.

Part of this expansion will have been Swiss Re’s return to the catastrophe bond market, with its $250 million Matterhorn Re Ltd. (Series 2019-1) deal issued in May.

On top of that, we understand that Swiss Re also grew its Sector Re collateralized reinsurance sidecar during the first-half of the year, to somewhere in the range of $700 million we’re told, to further support and extend its nat cat growth as well.

Of course, Swiss Re has an enormous balance-sheet that it can put to use, so while it says third-party capital use has significantly increased, that’s likely in relative terms to recent years only.

Speaking during a conference call today, Swiss Re’s Group Chief Underwriting Officer Edi Schmid explained, “In a further improving pricing environment, it made a lot of sense to recapture our share and grow the nat cat business.”

“This nat cat business still delivers a very attractive return on capital,” he continued, going on to say that a lot of the property catastrophe reinsurance business Swiss Re had shed in recent years was still of a high quality, so it made sense to retrieve a lot of it now the market environment is more attractive.

He explained that natural catastrophe risk still achieves a very attractive return-on-capital for Swiss Re and that given its life and health business is also a valuable diversifier for the firm.

“Loss-affected lines saw significant rate increases, but it was flat otherwise, the quality of the business was good so it made sense to grow,” he continued.

Adding, “We also ceded more to third-party investors. It is a very attractive space, the nat cat area, we understand the risk very well and are comfortable placing more capital and confident it will translate into a good contribution to earnings.”

Earlier today, CEO of Swiss Re Christian Mumenthaler also discussed the P&C reinsurance growth at Swiss Re.

He explained that as the market is coming slowly out of its soft cycle, Swiss Re has the size and diversification to be able to take advantage of this, as well as its proprietary risk knowledge.

Hence it made sense to grow back into the catastrophe space, Mumenthaler suggested, adding that the increased scale in P&C came at flat expenses, as no additional spend was required even though approximately $2 billion more of its SST (solvency capital) was deployed this year.

Protection has become more important as a result, which is partly where the third-party capital usage comes in for Swiss Re.

“Because we scaled up our nat cat we also scaled up some of our protection buying in the nat cat space,” Mumanthaler explained.

Discussing Swiss Re’s strategy with third-party capital, CUO Schmid said, “It is fair to say Swiss Re was at the forefront of establishing ILS 20 years ago. We’ve always used it, but didn’t make as big a fuss as others have done.

“We believe nat cat is very attractive business for Swiss Re’s balance sheet, we are a natural home ,so our mission is to remain a leader in nat cat.

“All of this together means it is a growing risk pool where we want to participate substantially, so we used third-party capital to help.”

“We have a maximum appetite for perils, so for us it makes sense to get it on the balance sheet, but then to share it with long term third-party capital investors when it gets too big,” Schmid explained.

CFO John Dacey was quick to add, “The vast majority remain of what we’ve written gross remains on our balance sheet.”

While the use of third-party capital increasing at Swiss Re is a sign of the improved market conditions, as well as an increasingly catastrophe exposed book, third-party capital remains a valuable lever that the company is clearly happy to make use of.

It will be interesting, as the year progresses, whether this greater use of ILS and the capital markets continues at Swiss Re.

With its Matterhorn Re catastrophe bond program now established, could Swiss Re elect to return and issue more cat bonds at the end of the year?

Given the figures on catastrophe exposure released today and cited above with the average 30% increase, only seem to include renewals up to and including April, as they are reported as figures at 04/19.

That means Swiss Re’s growth at June and July are not included (we believe).

Swiss Re’s CEO Christian Mumenthaler said this morning that at the Florida renewals, where the reinsurer was “massively underweight”, the company saw prices increasing up to 20%.

He said that the reason Swiss Re was underweight in Florida was that “the prices were short of what we required” adding that “But now the situation is ok we were able to increase here, as the price increases we saw here were quite substantial.”

So that suggests even more property catastrophe exposure increase, especially to U.S. hurricane risks, gained at the mid-year reinsurance renewals. Which may also imply that the need for third-party capital use is only going to persist and as a result we could see Swiss Re further increasing the size of its sidecar or issuing more catastrophe bonds.

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