The FINANCIAL — Despite expected insurance claims from Cyclone Debbie in Australia and pressures from a challenging business environment, Swiss Re generated a solid Group net income of USD 656 million in the first quarter of 2017.
The annualised Group return on equity (ROE) of 7.5% demonstrates Swiss Re is able to generate positive returns even when challenged by rate pressures, low interest rates and natural catastrophe losses. The Group capitalisation remains very strong with an SST ratio of 262%, and Swiss Re remains well positioned to respond to market opportunities while continuing to focus on its capital management priorities. As a reminder, Swiss Re has adjusted the format of its financial reporting for its first and third quarters to promote a longer-term view of its performance and align with recent changes in reporting practices across Europe, according to Swiss Re.
Swiss Re’s Group Chief Executive Officer, Christian Mumenthaler, says: “I am satisfied with our performance in the first quarter, given the challenging market environment. We have responded decisively to the continued pricing pressure across the industry by not accepting unprofitable business, and our top line clearly shows that. Our high-quality investment portfolio continues to make a significant contribution to the overall result. Events like Cyclone Debbie do take a toll on our short-term performance, but more than anything, they take a toll on people’s lives, destroy infrastructure and weaken economies. At the same time, natural catastrophes like this one underscore the purpose of the insurance industry overall. It is during such times that we can deliver our core services and demonstrate the value we provide to our clients and to society.”
Solid first quarter results in a challenging environment
Swiss Re reported solid net income of USD 656 million for the first quarter of 2017. The decline was primarily driven by the expected insurance claims in the aftermath of Cyclone Debbie. In addition, some large one-off realised gains in Life Capital, which supported prior-year’s first quarter results, were not repeated. Overall, Swiss Re expects its insurance claims for Cyclone Debbie to amount to approximately USD 350 million at a Group level, with around USD 320 million being incurred by P&C Re and approximately USD 30 million by Corporate Solutions.
The Group generated an annual ROE of 7.5% in the first quarter while it continued to invest into its business. This was done in an environment still characterised by low interest rates and sluggish overall global economic growth. The Group’s annualised return on investments (ROI) was 3.4% and the fixed income running yield was 2.9%.
Gross premiums written for the quarter declined 10.5% to USD 10.2 billion, as Swiss Re applied its disciplined underwriting approach and carefully selected the risk pools to which it allocates capital. Measured at constant foreign exchange rates, the decline would have been 8.8%.
Swiss Re’s capitalisation remains very strong, with the Group’s Swiss Solvency Test (SST) ratio for 2017 increasing slightly to 262%, comfortably above Swiss Re’s respectability level of 220% and one percentage point higher than last year’s figure. The reported 2016 figure of 223% was adjusted to reflect recent calculation changes implemented by the Swiss Financial Markets Supervisory Authority (FINMA) to align the SST ratio more closely with Solvency II. Swiss Re is well positioned to weather any significant headwinds while continuing to focus on its capital management priorities.
Swiss Re’s Group Chief Financial Officer, David Cole, says: “The satisfactory result in the first quarter demonstrates our ability to deliver in a difficult market environment while we continue to invest in building the long-term value of our businesses. Our capital position remains very strong and our reserve strength intact. Disciplined underwriting allows us to allocate capital to selected opportunities which we believe will support our future success.”
P&C Re results impacted by Cyclone Debbie expected claims
Expected claims of USD 320 million from Cyclone Debbie impacted P&C Re’s results in the first quarter. As the majority of home and contents policies sold by Australian insurers include cyclone damage, the reinsurance cover will help people and businesses rebuild.
Net income in the first quarter still amounted to a solid USD 321 million and annualised ROE was 10.8%. The combined ratio increased only slightly to 95.6%, as natural catastrophe losses were partly offset by favourable prior-year development.
With the pricing environment continuing to be difficult, Swiss Re strictly followed its disciplined underwriting approach, ensuring it receives an adequate price for the protection it provides. The decline in gross premiums written by 17.6% to USD 5.8 billion in the first quarter was therefore the result of the active reduction in capacity, in particular in EMEA and Chinese quota share business, partly because prices did not meet profitability expectations. Measured at constant foreign exchange rates, the decrease would have been 15.6%.
A significant milestone in the first quarter was the opening of Swiss Re’s new India branch in Mumbai in February 2017. The company was among the first five foreign reinsurance companies to obtain a license to sell reinsurance in India. The Indian insurance sector is expected to grow at an average annual growth rate of 8% from 2017 to 2025. Swiss Re will therefore be able to offer both non-life and life and health reinsurance solutions directly to clients and brokers in the country.
Attractive portfolio maintained at April renewals
In the April treaty renewals Swiss Re maintained its underwriting discipline and reduced capacity in business which did not meet its profit expectations. Premium volume decreased by 2%. The year-to-date risk-adjusted price quality remains at 101%, the same as during the January renewals, exceeding the hurdle rate to achieve Swiss Re’s targeted Group ROE over the cycle. Swiss Re maintained an attractive portfolio, supported by large and tailored transactions.
L&H Re continued good performance track record
L&H Re delivered good net income of USD 193 million in the first quarter. The annualised ROE of 11.6% was at the upper end of the 10%-12% range Swiss Re has set for this business segment as an over-the-cycle target. The result was impacted by a few large claims in US Individual Life business and lower foreign exchange gains, but benefited from stable investment income. The fixed income running yield for the quarter remained stable at 3.4% compared to the full year 2016.
Gross premiums written for the quarter were slightly down compared to the first quarter last year, mainly due to changes in some intra-group retrocession agreements and foreign exchange rate movements. Adjusted for these agreements as well as for currency effects, the premiums grew 2.2%, highlighting L&H Re’s ongoing success in identifying attractive growth opportunities.
Corporate Solutions reported solid results, despite claims from Cyclone Debbie
Swiss Re’s Corporate Solutions unit delivered solid net income of USD 55 million in the first quarter. The result was mainly impacted by Cyclone Debbie, for which Corporate Solutions expects to incur claims of approximately USD 30 million. The annualised ROE for the first quarter was 10.1%.
Gross premiums written decreased by 10.8% to USD 717 million in the first quarter of 2017. The premium volume in the first quarter last year benefited from the acquisition of IHC Risk Solutions, LLC. Additionally, cycle-related pricing pressure continued in many of the markets where Corporate Solutions is active. The combined ratio for the first quarter was 99.6%.
As part of its strategy to invest in attractive long-term growth, Corporate Solutions expanded its footprint in Asia and opened a new office in Kuala Lumpur in March 2017. The office will focus on servicing large and mid-sized Malaysian businesses.
Life Capital delivered strong gross cash generation
Life Capital continued to deliver on its strategy to optimise cash generation. In the first quarter of 2017, gross cash generation amounted to a strong USD 336 million. This reflected the underlying emerging surplus on the ReAssure business in the UK and a benefit from finalising the year-end statutory valuation.
At the same time the Business Unit generated a net income of USD 73 million. As expected, large one-off realised gains on the investment portfolio in Q1 2016 were not repeated. The annualised ROE for the first quarter was 3.9%.
Gross premiums written for the quarter increased to USD 652 million driven by growth in the open books business, which demonstrates how Life Capital is increasing Swiss Re’s access to attractive and growing risk pools in the life and health markets.
Strategic priorities for the future
Swiss Re applies fresh perspectives and proprietary knowledge to allocate its capital to attractive risk pools. It continues to invest in its research and development activities, further strengthening its position as a risk knowledge company. The launch of the Swiss Re Institute in March 2017 is a good example of this. Its focus on providing research on pressing industry topics, ranging from cyber risks to food security, will help Swiss Re to support society in closing global protection gaps.
The establishment of a dedicated regional legal entity in Singapore, for its Reinsurance Business Unit, which was announced in April, demonstrates the company’s ongoing commitment to Asia. As one of the region’s largest reinsurers, Swiss Re will continue to combine its global knowledge with even deeper insights into local and industry needs, to benefit its clients and partners.
These efforts, together with the successful application of Swiss Re’s existing strategic framework, position the Group well to meet market challenges and take advantage of the opportunities that emerge as protection needs develop.
Swiss Re’s Group Chief Executive Officer, Christian Mumenthaler, says: “We see that risk pools continue to expand, even though we expect the overall environment to keep us on our toes. We will remain selective about the risks we accept. Our unique client relationships, strong capital base and deep risk knowledge enable us to deploy our strengths to help our clients and society at large.”