Swiss Re CEO, CFO praise diversification away from P&C reinsurance

Swiss Re’s net income plummeted to $331 million in 2017 compared to $3.56 billion in 2016.

P&C Reinsurance posted a net loss of $413 million for 2017 after a net income of $2.10 billion in 2016.

Estimated combined claims of $3.7 billion from 2017’s large natural catastrophes including hurricanes Harvey, Irma, and Maria, Mexican earthquakes and Californian wildfires led to the “strong decline” in P&C Re’s results.

“The fact that we were able to report a net income for the year is a very strong demonstration of the diversification of our business,” said Cole during the Feb. 23 results presentation (picture left). “Life & Health and the investment side of the business performed extremely well in 2017,” Cole noted.

Life & Health Reinsurance (L&H Re) increased net income to $1.10 billion in 2017 from $807 million in 2016.

The 2017 results seem to have reassured Mumenthaler that his strategy to strengthen the Life & Health business is correct.

In August 2017 Mumenthaler had already said that Swiss Re is seeking opportunities to grow its life reinsurance business as it shrinks its property/casualty operations, waiting for the soft market to ease.

P&C Reinsurance drags

After the historically high catastrophe losses of 2017, the reinsurance industry was hoping for strong rate increases in the January renewals, but prices have disappointed the expectations of a more significant turn in the market. Swiss Re achieved price increases of 2 percent during renewals.

“Obviously, we could have hoped for something better but in view of where the market went we are satisfied with what we have done,” Mumenthaler (picture left) commented.

Nevertheless, Swiss Re grew the business 8 percent year on year to $8.1 billion in January renewals, driven by higher rates across all major lines of business and regions and new large transactions.

Mumenthaler stressed that Swiss Re went for quality rather than quantity during the renewals, and that the company discarded some business.

“We really think that it is very important for the whole value chain to get back to a sustainable level. Obviously with our size we have an obligation to lead markets. That’s also in the interest of our clients. If reinsurance market prices drop, primary prices follow,” Mumenthaler explained.

In 2017, gross premiums written in P&C Re declined to $16.54 billion from $18.15 billion in 2016.

“Last year we reported about renewals and we had cut quite a bit of the business on the nat cat side,” Mumenthaler noted. “Within hindsight, that was the right thing to do. You need to be disciplined in underwriting and when prices go down you need to cut some of the capacity and that was helpful in view of what happened in the year.”

During the presentation, Mumenthaler said that it would be a reasonable assumption to see further price improvements throughout the year and described his expectations for pricing in general as “relatively optimistic.”

Life & Health Reinsurance delivers

But the Life & Health Reinsurance (L&H Re)  business seems to please Mumenthaler more at the moment. “We continue to be very optimistic,” he said. “The biggest change has been Asia, where we have seen really nice growth.”

Gross premiums written in L&H Reinsurance grew to $13.31 billion in 2017 compared to $12.8 billion in 2016.

“We continue to diversify this earnings stream by writing attractive new business,” Cole said. “In 2017 specifically, we wrote two large new transactions in both the US as well as in Asia,” he noted.

While P&C Re delivered a return on equity (ROE) of negative 3.5 percent in 2017, L&H Re delivered an ROE of 15.3 percent.

“The big transactions are starting to play an important role for us,” Mumenthaler said.  “In 2017 it was about 25 percent of our new business underwriting profit. We think this will continue,” he added.

The Swiss Re Institute projects 12 percent market growth in high-growth markets per year in life and health reinsurance over the next five years. This expectation is based on global population growth combined with increasing access to insurance products.

There will be a long transition time until high-growth markets become saturated and the growth speed of the insurance sector in these countries is set to exceed gross domestic product (GDP) growth, Mumenthaler noted.

“In terms of the raw materials, the markets, its plausible for us to see further growth. It’s more a question of the price level and can we play within that market,” he said.

Large and tailored transactions in life and health reinsurance are driven by the need to free up capital from old business to do target new business opportunities. Swiss Re sometimes reinsures this old business or takes it over completely via its UK subsidiary ReAssure.

Through ReAssure, Swiss Re acquires closed or non-core in-force life insurance portfolios.

Swiss Re expands Life Capital

In December 2017, Swiss Re acquired 1.1 million life insurance policies from UK financial service provider Legal & General Group (L&G) for £650 million.

The move followed an agreement with Japanese insurance group MS&AD for an investment into ReAssure of up to ₤800 million.

“We are extremely pleased to have found third-party investors,” Mumenthaler said.  “They came on board of our capital structure there and it allowed us to do one more transaction there at the end of the year with L&G.

“I think that is not the end of it. The UK market is very active right now. I think there will be more opportunities,” Mumenthaler said. “The prospects are very good for that business”.

“What’s most pleasing to me is the integration of the Guardian business transaction which has now been completed,” Mumenthaler said. Swiss Re acquired Guardian Financial Services Europe from private equity company Cinven for £1.6 billion in 2015.

The Guardian unit paid up to the group a dividend of $1.1 billion during the second quarter of 2017, Mumenthaler noted.

Swiss Re is also acquiring open life books to expanding and diversify the operations further.

The reinsurer operates in the segment through elipsLife, a primary life insurance company that specialises in corporate customer business (B2B). IptiQ is Swiss Re’s white labelling digital platform that provides life and health insurance products in partnership with other brands.

Overall, gross premiums written in Swiss Re’s Life Capital unit grew to $1.76 billion in 2017 from $1.49 billion in 2016, mainly driven by growth in open book businesses. Swiss Re stressed the significant gross cash generation that Life Capital delivers.

There is hope for Corporate Solutions

Despite the major natural catastrophe losses that impacted its Corporate Solutions business in 2017, Swiss Re believes that the future of its commercial insurance arm and wants to continue investing in it.

“It was a very bad year but if you look ahead we think we are going to profit from some market hardening,” Mumenthaler said. “It’s a highly cyclical business. We are very confident about the long-term prospects of the business.”

The unit delivered a net loss of $741 million in 2017 after a net profit of $135 million in 2016. The business was impacted by large natural catastrophe losses of $1.0 billion in 2017. In addition, the overall price level declined due to prevailing soft market in particular in the large corporate segment.

“We continued to see some negative prior-year development, part of which has to do with the nature of the business that we’ve written, primarily some excess of loss, a significant component of our business which has some higher volatility plus some delayed submissions of claims,” Cole noted.

Swiss Re injected $1 billion equity capital in Corporate Solutions to enable the unit to take advantage of expected rate increases.

“We did that because we believe in the future of the business and we wanted to position Corporate Solutions to be able to take advantage of what we believe would be more attractive business writing opportunities and pricing situations going forward,” Cole explained.

“We remain convinced of and committed to this business. We are investing to expand this businesses’ footprint as well as its product capability,” he said.

Cole believes that corporate solutions is an important and attractive market for Swiss Re over a longer period of time and it is rebalancing the portfolio, reducing the concentration in North America and diversifying the stream of earnings.

Swiss Re seeks M&A

And, Swiss Re is looking for acquisition targets.

“In Corporate Solutions we have done numerous bolt-on acquisitions including one joint venture,” Mumenthaler said.

In July 2017, Swiss Re Corporate Solutions, and Bradesco Seguros, the insurance conglomerate of Bradesco Group, have officially started their joint venture operation in Brazil.

“If there was something larger that would help Corporate Solution grow we would definitely look at that. Prices are just very high. That’s hampering M&A generally in this field,” Mumenthaler noted.

Swiss Re would have the capital for M&A transactions and Mumenthaler can also imagine making small acquisitions in group life or in ReAssure.

At the same time, Mumenthaler said that it is unlikely that Swiss Re would make acquisitions in the reinsurance segment because the firm is already such a big player in the field.

“We are in all the countries, have the biggest clients. It’s hard to see what kind of value could be created through an acquisition,” Mumenthaler said.