Swiss Re's capital will absorb poor 2019 earnings – S&P

Even though Swiss Re performed materially below the expectation of S&P, the ratings agency has said it expects Swiss Re to maintain its risk-based capital above the 'AA' level, which supports the 'AA-' long-term ratings and stable outlook on its core operating entities.

“Unlike some of its peers, Swiss Re Group benefits from its capital buffer - which it has built up over time - above our requirement for 'AAA' level risk-based capital (measured using our model),” said S&P. “From a regulatory perspective, we anticipate that the Swiss Re Group is likely to report a solvency ratio above its target of 220 percent (241 percent at midyear 2019).”

Swiss Re reported a 2019 net income of $727 million, compared with S&P’s forecast of nearly $2.5 billion as at August 2019. The company suffered higher-than-expected natural catastrophe losses, notably from Dorian, Faxai, Hagibis, and the Australian bushfires. In addition, there were prior-year adverse reserve developments related to Typhoon Jebi and the US casualty lines, which hit both the reinsurance and primary business (Corporate Solutions [CorSo]).

“In particular, CorSo's performance has remained weak - it reported a bottom-line loss of $647 million in 2019 - and this continues to hurt the group's results,” said S&P. “We understand that the group still expects its corrective underwriting actions to improve CorSo's combined (loss and expense) ratio to 98 percent by year-end 2021. The reinsurance business reported a high combined ratio of 107.8 percent, while CorSo reported another very high combined ratio (127.9 percent).

“Once again, the group's bottom line benefited from good results in the life and health reinsurance business (net income of $899 million) and favourable investment returns, with a running yield of 2.8 percent. Overall, Swiss Re's non-life results make the group a negative outlier relative to close peers.”

S&P said it still expects the group to post a combined ratio of 95 percent to 99 percent (reinsurance and CorSo consolidated) for 2020 and net income close to $2.5 billion.

“This is because its underwriting performance on the non-life side is likely to benefit from premium rate rises through 2020 renewals.,” said S&P. “The rate rises for April renewals are likely to be favourable, particularly following the material losses from Japan during 2019. Furthermore, earnings from life and health reinsurance will continue to support earnings.”