Reinsurance major Swiss Re has reported net income of $331 million across the group business in 2017 this morning, despite the catastrophes of the last year hitting the firm for $4.7 billion of losses.
Swiss Re’s ability to turn a profit even after such large levels of losses is testament to the globally and line of business diversified reinsurance and insurance platform it has created, as contributions from life, health and investments helped it avoid a net loss.
Swiss Re Group Chief Executive Officer, Christian Mumenthaler, commented on the results, “The severe natural disasters of 2017 are not only loss events, they are above all human tragedies and we are deeply moved by the devastation caused. In times like these we demonstrate the critical role re/insurance plays in enabling people and economies to recover. I am proud that Swiss Re, also through our clients, will be supporting people and businesses affected with estimated payouts of USD 4.7 billion. 2017 proved how our strategy to maintain a superior capital position and pursue disciplined underwriting continues to be the right approach.”
The company noted 2017 as among the most costly years it and the industry has faced, with combined claims from natural catastrophe events of $4.7 billion.
This pushed the property and casualty reinsurance business to a net loss of $413 million, after it took $3.7 billion of the losses and a 111.5% combined ratio.
The Corporate Solutions division also fell to a net loss of $741 million, after natural catastrophe claims of $1 billion and a 133.4% combined ratio.
It’s notable that the losses are net of retrocession and this does raise the question whether greater use of retrocession could have helped to take down the loss totals and support the combined ratio more, but that would have reduced net income due to the costs.
Reinsurance firms the size of Swiss Re face a juggling act of retro buying versus income preservation in major loss years such as this, however use of the capital markets could have assisted the firm with efficient protection perhaps.
Swiss Re’s life and health reinsurance business performed well, with net income of $1.1 billion and a return on equity of 15.3% in 2017.
The Life Capital unit, that provides closed book life solutions among others, generated net income of $161 million and saw strong gross cash generation of $998 million during the year.
At the same time the investment side of Swiss Re’s business also performed well, with the portfolio returning 3.9% and having a 2.9% running yield.
The result was a group return on equity of just 1% for 2017, well down on 2016’s 10.6%, while earnings per share (EPS) of USD 1.03 or CHF 1.02, compared to USD 10.72 or CHF 10.55, was again well down due to the catastrophe losses.
At the same time Swiss Re had maintained its underwriting discipline in 2017, as gross premiums written dropped by 2.4% to $34.8 billion. In property and casualty reinsurance Swiss Re’s gross premiums written fell as it practiced active portfolio management and underwriting discipline, the company said. While in life and health reinsurance its gross premiums written increased driven by new business wins in Asia and the Americas, including some large transactions.
Swiss Re Group Chief Financial Officer, David Cole, added, “The 2017 results clearly show the strength of our diversified business model. The losses in our P&C businesses were offset by strong results in our life and health businesses, further supported by our investment performance. Our capital position remains very strong and we continue to have ample financial flexibility to invest in future growth and business opportunities as they arise.”
Swiss Re has noted the better market conditions at the key January 2018 renewals, which caused the reinsurer to increase its renewal volumes to $8.1 billion, up from $7.5 billion, an 8% increase which the firm said was driven by “higher rates across all major lines of business and regions and new large transactions.”
Swiss Re said that pricing increased by 2% in total, with rises most pronounced in the loss-affected property lines and more moderate in other lines. The renewal portfolios risk-adjusted price quality increased to 103%, the firm said, noting that the majority of the loss-affected US property business will be up for renewal later in 2018.
So the reinsurer clearly hopes for ongoing rises, or at least stable prices increases compared to January, when it comes to the mid-year 2018 renewal season and the company is positive about the outlook as a result.
Mumenthaler explained, “2017 was clearly a challenging year for the industry – and Swiss Re. However, we believe the outlook for our industry is now more positive than it has been during the last four years. Changes in the market environment, such as adjusting property and casualty price levels and increases in interest rates, are expected to be beneficial for our business.
“In addition, the catastrophes are a reminder of the relevance of large global re/insurers and their role in tackling the large worldwide insurance protection gap. It visibly shows that the need for insurance is increasing due to developments such as population growth and the concentration of assets in catastrophe-prone regions.”
Swiss Re has clearly proved itself resilient to the losses, but the results do reflect a company still struggling a little with market conditions.
Two facts demonstrate this. First that the net income profit was largely driven by the disposal of a Chinese life insurance asset, Swiss Re’s stake in New China Life, which drove $240 million of the $331 million net income. Second, that the normalised combined ratio for the P&C reinsurance business, taking into account just average loss activity, stands at 100% according to analysts.
With the reinsurance market continuing to adjust to the new normal pricing and capital efficiency conditions, this suggests an ongoing focus on modernising the business, innovation, reducing costs and enhancing efficiency of capacity will be key for all major reinsurers.
You can read the full results statement from Swiss Re here.