Swiss Re struggles to find profitable growth opportunities

Swiss Re’s 2016 performance was affected by low interest rates pressuring investment returns and a soft market in P&C and in corporate solutions.

The company’s net profit dropped by $1 billion to $3.6 billion in 2016.

Net income in P&C reinsurance declined to $2.10 billion from $3.01 billion in 2015. A soft market has been pressuring the P&C market for a while and rates continue to decline, although at lower a pace.

Rate declines in the 2017 January renewals were half as big as they were in the previous year, CEO Christian Mumenthaler notes during a Feb. 23 press conference, adding that Swiss Re defended profitability over volume. “Thanks to an 18 percent cut in volume we could keep price adequacy at 101 percent,” he adds.

Swiss Re walked away from almost $2 billion of business including substantial portions of contracts in China due to rates being below its targeted risk-adjusted levels.

Swiss Re said it renewed $8.5 billion of the $10.3 billion of premium volume up for renewal on 1 January 2017, driven by "disciplined underwriting and reduced capacity in almost all segments," it said.

A highlight within P&C remains tailored transactions, which allowed the overall gross premiums written in the unit to grow by 12.7 percent to $18.15 billion in 2016. Tailored transactions are generally more profitable than the traditional reinsurance business.

Nevertheless, Swiss Re expects the combined ratio of P&C in 2017 to be around 100 percent assuming an average large loss burden.

Eventually, rates will recover, Mumenthaler suggests: “P&C is highly cyclical. Overall I am not worried that it will go up over time, but in this phase disciplined underwriting is really important.”

Meanwhile, the situation does not look any better at Swiss Re’s corporate solutions business, a field it nevertheless believes has great growth potential.

Corporate solutions, Swiss Re’s commercial insurance arm, was created in 2012, carved out from the reinsurance business as it was seen as an attractive growth field, Mumenthaler explains. At the beginning it was growing nicely, but then prices declined, he notes.

For corporate solutions 2016 was a “disappointing year,” Mumenthaler says.

The unit’s net income fell to $135 million in 2016 from $357 million in 2015. The combined ratio was at 101.1 percent in 2016 compared to 93.2 percent in 2015.

The unit’s results were impacted by continuing pricing pressure in the marketplace as well as large man-made losses, in particular casualty losses in North America.

The business was impacted by significant claims losses in 2016. One was a pipeline leak, another one was a fire in trees that cut the power line and ultimately led to a liability loss to the people responsible for trimming the trees along the power line.

“Most of the lines are under water,” says Mumenthaler. “It’s an incredibly tough market right now,” he notes. As a result, “we intend to cut some of the businesses,” he notes.

Swiss Re does, however, remain optimistic about the long term opportunities corporate solutions offers. One growth driver is likely to be the motor business. With the introduction of self-driving cars this business will be transferred to liability products in the corporate space, Mumenthaler explains.

“I don’t see the corporate space as attacked as the retail space,” he says. Retail insurance business is undergoing significant change through digitisation and disruptors from the so called insurtech sector.

Following this thought, Swiss Re continues to invest in the corporate solutions segment as it hopes for a more attractive operating environment in the future.

“Notwithstanding the challenging market we continue to pursue our strategy both in terms of product capability but also geographic footprint,” CFO David Cole says.

In 2016, Swiss Re acquired employer stop loss (ESL) underwriter IHC Risk Solutions for $152.5 million.

Swiss Re Corporate Solutions also partnered with Brazil’s Bradesco Seguros, to create one of the biggest commercial large-risk insurers in Brazil.

Bradesco Seguros, the insurance arm of Bradesco bank, will contribute its commercial large-risk portfolio to a newly created Swiss Re unit and give it exclusive access to its distribution network. In return, it will take a 40 percent equity stake in the new entity.

Once completed, Swiss Re will be the leading commercial large risk insurer in Brazil, Cole says.

Overall, gross premiums written in the corporate solutions segment increased by 5.8 percent to $4.1 billion in 2016, driven by the acquisition of IHC Risk Solutions.

Swiss Re expects corporate solutions to record a combined ratio of around 103 percent in 2017, assuming average large losses and no reserve releases.

The situation in Swiss Re’s Life & Health Reinsurance segment appears somewhat better, as net income only dropped to $807 million in 2016 from £968 million in the previous year.

Potential growth in this market segment is fuelled by an expanding need for life and health protection, driven by ageing societies and more private sector involvement in welfare, according to the presentation.

Swiss Re sees opportunities for transactions in mature markets from increased focus on capital, risk and balance sheet optimisation as well as increases in sales of primary life business in high growth markets.

But the best performing business unit is arguably Life Capital. It was created in January 2016 to manage open and closed life and health insurance books, helping partners reach new markets and offer new products.

Net income in Life Capital grew to $638 million from $424 million in 2015, according to the presentation.

In this segment, Swiss Re sees strong growth opportunities based on key trends including regulatory reforms, technology, changes in distribution channels, efficient capital allocation and closing of protection gaps.

But Mumenthaler suggests that it is currently difficult to find growth opportunities for the group.

“We really would like to grow the business. The two most obvious areas are corporate solution and life capital.” However, “it is a challenging environment, it is hard to find deals that make sense for shareholders,” he notes.

But even in this low growth environment, the returns produced by the businesses satisfy Swiss Re’s management. The ROE in 2016 was 10.6 percent, overachieving the goal of 700 basis points above risk-free rate as only Corporate Solutions was below its target in 2016.

In the absence of growth opportunities, Swiss Re may, as many of its competitors like SCOR, repatriate capital to shareholders.

The board will propose an increase of the regular dividend by 5.4 percent at the 2017 annual general meeting. In addition, the board will propose a public share buy-back programme of up to CHF 1 billion.

While Mumenthaler admits that there are short term challenges, he believes that long term there are “a lot of attractive risk pools” which will grow over the next ten to 20 years.

He points to global demographic growth, increasing wealth and market growth to illustrate his point.

“Our major focus should be to keep access to these risk pools. We are going to be a risk knowledge company that invests into these risk pools,” he explains.