Swiss Re CEO seeks life deals as P&C remains unattractive

“We have a lot of excess capital,” group CEO Christian Mumenthaler said during Swiss Re’s Aug. 4 first half results media presentation. “In the short term, opportunities are probably more on the life & health side.”

Mumenthaler envisages, for example, doing more big in-force transactions similar to the one it struck with Citigroup.

At the end of March 2016, a subsidiary of Swiss Re Life & Health America replaced Prime Reinsurance Company as Primerica Life Insurance Company's reinsurer on a coinsurance agreement covering a block of term life insurance policies that were in force on December 18, 2009.

The coinsurance agreement represented the majority of Citigroup's remaining reinsurance activities with Primerica, following Primerica's initial public offering and ultimate separation from Citigroup.

Swiss Re may also pursue transactions on the life capital side and acquire closed books in the UK, for example, where competition is weak. Such transactions help clients free up capital to invest in other fields, Mumenthaler explained.

“I would expect a little bit more in the life space at this stage,” Mumenthaler said.

Net income in life & health reinsurance grew to $432 million in the first half of 2017 from $417 million in the same period a year ago. Gross premiums written shrank to $6.40 billion from $6.59 billion over the period.

Calling the performance of its life & health unit “very strong”, CFO David Cole noted that “we continue to see attractive business opportunities in life & health around the globe”.

Swiss Re managed to complete several large tailored transactions in the first half, Cole noted. “In Asia our strong growth in health continues, particularly in China, and our recent renewals in Australia and New Zealand were also successful,” Cole said.

The operating environment in life and health contrasts with the one Swiss Re faces on the P&C side. Net income in the P&C division fell to $546 million in the first six months of 2017 from $870 million in the same period a year ago.

While the division took a $320 million hit from  Cyclone Debbie in Australia, Swiss Re is also shrinking the business due to the soft market to maintain profitability levels.

Gross written premiums in P&C declined by 15.5 percent year on year to $9.4 billion in the first six months of 2017.

Swiss Re is reducing capacity in lines where prices do not meet profitability expectations, Cole explained.

As a result of its selective approach but also due to the absence of large catastrophes, Swiss Re managed to keep its combined ratio stable in P&C at 97.4 percent compared with 97.2 percent in the first six months of 2016.

Despite the difficult market environment in P&C, Mumenthaler also noted that opportunities for acquisitions remain scarce.

“For some strange reason, everything in P&C is hopelessly overpriced at the same time that the market is depressed,” Mumenthaler said.

Excess capacity has driven rates down in the P&C market. Despite rates being soft, investors seeking higher returns in a low interest rate environment still regard the reinsurance sector as an opportunity.

This is partly demonstarted by the strength of the non-life insurance-linked securities (ILS) sector at the moment. Issuance reached a record breaking $6.3 billion in the second quarter of 2017, according to the latest ILS market update from Willis Towers Watson Securities.The second quarter of 2017 saw $6.3 billion of non-life catastrophe bond capacity issued through 36 tranches, compared with $1 billion issued through 17 tranches in the in the same period a year ago and exceeding the previous quarterly record of $4.5 billion issued in the second quarter of 2014.

The second quarter of 2017 saw $6.3 billion of non-life catastrophe bond capacity issued through 36 tranches, compared with $1 billion issued through 17 tranches in the in the same period a year ago and exceeding the previous quarterly record of $4.5 billion issued in the second quarter of 2014.

This influx of capacity has the knock-on effect of further depreccing pricing in property-catastrophe business.

In addition, and arguably causing a bigger impact on pricing is capital flowing into other forms of collateralized reinsurance, Mumenthaler suggests. Some pension funds, for example, are now using a transformer to do deals directly, offering collateralized capacity, he explains. “It’s similar to ILS but you don’t have all the cost of structuring and making it public,” he said.

“This has grown quite a lot,” Mumenthaler added. This capacity is now a big player in the cat market, dampening the price and preventing prices from skyrocketing as they did in the past.”

Partly as a result of so much capacity now able to enter the business quickly, Mumenthaler does not expect any big upticks in rates in the absence of a large cat event.

But Swiss Re is not writing off the P&C market completely. “In the medium and long-term, P&C will be an important source of transactions,” Mumenthaler said.