Analysts at Barclays and JP Morgan are anticipating that Swiss Re may purchase further adverse development cover (ADC) to protect the underwriting result of its Corporate Solutions business, which was hit particularly hard by recent catastrophe losses.
The move will likely come as part of a broader overhaul of the unit’s reinsurance protection, following a comprehensive review and the appointment of new management earlier this year.
Barclays noted that the business currently utilises little reinsurance capacity due to its status as a primary business in a diversified reinsurance group.
However, in order to deliver sustainable results comparable with peers in the industry, it could benefit from excess of loss cover limiting large loss volatility.
This may create growth headwinds for the Corporate Solutions arm even if Swiss Re’s management continue to see attractive opportunities in the hardening market.
Accordingly, Barclays has trimmed its earned premium growth expectations for the business to -10% for 2019 and 0% for 2020.
JP Morgan added that the Corporate Solutions business is likely to show a $350 million strengthening of reserves in its upcoming second quarter results, as well as a fresh capital injection from the group and revised growth ambitions.
It anticipates a net strengthening of $500 million over the first half of 2019 and a net loss for the year at $323 million.
The business’s standalone Swiss Solvency Test position was 137% at year-end 2018, down from 160% in 2017. JP Morgan assumes it will receive a capital injection of around $750 million to restore the ratio to this level.
With the reserve adequacy of the business also lacking despite $521 million of reserve additions in 2017-18, Barclays also forecasts a $400 million one-off reserve strengthening charge in 2019.
Analysts concluded that the actions were manageable for Swiss Re, given that the Corporate Solutions business accounts for less than 10% of the group’s book value and only around 5% of its earnings.
However, combined with the impact of large natural catastrophe losses and continued loss creep, expectations for the group 2019E net income were reduced by 25% to $1.75 billion.
Swiss Re is particularly exposed to such losses due to its relatively small catastrophe budget for the first half of the year.
