Global reinsurance firm Swiss Re missed analyst forecasts in its half-year results reported today, with the challenging market environment becoming very clear as its performance, earnings and return to investors continues to decline.
The effects of a more competitive reinsurance market awash with capacity and the resulting consecutive years of price softening are evident, and Swiss Re continues to take action, with a concerted pull-back in premiums written across the underwriting business again reported.
Natural catastrophes hit the reinsurer, with the company reporting a $360 million impact due to cyclone Debbie’s hit on Australia during the first-half.
The result is still more than adequate, but an analysis of performance over the last four years shows that market conditions are beginning to take their toll.
Swiss Re’s Group Chief Executive Officer, Christian Mumenthaler, commented; “In the first half of 2017, we reported a solid result – despite the challenging market environment and having paid significant claims in the aftermath of natural catastrophes. While in the short term these drivers, especially the pricing pressures, are concerning and are being addressed, we are steering our company with long-term value creation in mind.”
Swiss Re reported net income of $1.2 billion for the period, which is 35% down year-on-year from $1.86 billion a 10% miss to analyst consensus, and a return on equity of 7%, down from 10.9% in the prior year.
The decline is largely due to catastrophe losses and one-off items in the prior year, the company explained.
However, the performance in core P&C reinsurance shows a continual decline over recent years, which has continued, and the normalised combined ratio continues to creep towards 100%, a reflection of the challenging market environment.
Swiss Re is taking action though and premiums written have declined again as the firm pulls-back.
The company underwrote 8.3% fewer premiums, at $18.1 billion, which it puts down to “disciplined underwriting and active portfolio management.”
In the P&C reinsurance arm gross premiums written dropped by 15.5% to $9.4 billion, a significant pull-back and clear evidence of the pressure on even the largest reinsurers increasing.
“This was the result of a disciplined reduction in capacity where prices did not meet Swiss Re’s profitability expectations,” the company explained.
Income for the P&C reinsurance unit fell by 37% to $546 million, down from $870 million in the prior year.
The P&C combined ratio is reported as 97.4%, a slight increase from the prior years 97.2%. But analysts at Morgan Stanley said that normalised this is now 99.6%, which reflects worsening performance likely due to the softer and challenging market.
Swiss Re also underwrote fewer premiums at the July renewals, with premium volume down 10% for that key period, although risk adjusted price quality remained at 102%, according to the firm, suggesting the softening has slowed.
In life reinsurance the company reported net income rising 4% to $432 million year-on-year, which is a positive result after recent reports. Premiums declined by 2.8%, but new business opportunities were secured in the Americas and Asia.
Swiss Re’s Group Chief Financial Officer, David Cole, said; “While our property and casualty segments continued to experience pricing pressure in line with the overall industry and market environment, our life and health segments have delivered stable or even improved results. This shows the importance of having a diversified business model which can help to balance out volatility in individual areas. In addition, it is a differentiating factor that, together with our strong client relationships, can support our long-term value creation.”
Corporate Solutions, which is the unit where so much focus has been placed at Swiss Re in recent years as it looks to expand further into commercial insurance lines, was hit by higher natural catastrophe losses and ongoing pricing pressure, Swiss Re said.
Net income of $39 million is down 29% on the prior year, while a technical underwriting loss is evident with a combined ratio of 104.5%, up from 101.6% in the prior year. The worsening in the combined ratio is due to losses, negative prior year development and price pressure.
Premiums here actually declined by 4.7%, suggesting that pricing conditions must be really poor as the reinsurer has been growing this unit, making many hires and opening new regional offices and hubs.
Life Capital saw a decline in income of 75% to $143 million, down from $569 million in the prior year. One-offs in 2016 had driven a much higher result then, but with ROE of just 4% it’s not yet clear that this area of the business is out of the woods after a few challenging years.
But overall the result is more than adequate and Swiss Re, remaining extremely well capitalised and poised for ongoing expansion and diversification, is well positioned in the challenging market environment.
The soft market is clearly evident in P&C reinsurance and Corporate Solutions results. This effect will not go away any time soon, without major losses striking the marketplace.
Group CEO Mumenthaler closed; “We acknowledge that the market environment remains difficult. At the same time, we take decisive measures addressing the industry challenges head on. We will continue to be selective in choosing the risks we underwrite, aiming to ensure future profitability. We are equally determined to put our knowledge and leadership position to work and collaborate with our clients. I am confident the long-term trends for our industry are positive as risk pools will continue to grow.”
Full Swiss Re results can be accessed here.