Swiss Re: January renewal price increases outpace higher loss assumptions

For global reinsurance firm Swiss Re, a reported 18% average increase in property and casualty prices for business underwritten at the key January 2023 renewals more than offset higher loss assumptions of 13%, while the company has also been dealing with inflation.

Swiss Re reported its annual results this morning, providing some insights into how the reinsurance company is managing inflation within its P&C book.

The company has reported a profitable year, despite underwriting challenges, with its property & casualty reinsurance (P&C Re) net income reaching US $312 million for the full-year, but on the back of a technical underwriting loss based on a combined ratio of 102.4% for 2022, 91.0% for the fourth quarter.

Swiss Re’s Group Chief Executive Officer Christian Mumenthaler commented that, “2022 was a challenging year, marked by the war in Ukraine, surging inflation, the tail end of the COVID-19 pandemic and elevated natural catastrophe losses.

“We have focused on addressing these challenges proactively, all while maintaining our very strong capital position. This has enabled us to take advantage of attractive market conditions at the January renewals, while continuing our commitment to the ordinary dividend.”

Swiss Re’s Group Chief Financial Officer John Dacey explained some of the actions taken during 2022, saying, “Throughout the year, Swiss Re took measures to add USD 1.1 billion in reserves to address the risk of higher claims due to economic inflation across our property and casualty businesses. Higher interest rates are already helping to compensate for this impact, with the contribution from our fixed-income portfolio rising by USD 170 million in the fourth quarter compared with the prior-year period.

“After absorbing a significant impact from COVID-19 in the early part of 2022, L&H Re has returned to attractive levels of profitability. Corporate Solutions continued to deliver resilient results and outperformed its full-year target. We are pleased to end the year with a solid fourth-quarter result that was driven by strong operational performance from our main businesses.”

For 2023, Swiss Re has a target to produce net income of more than US $3 billion, part of which will be down to an expectations of successful P&C Re renewals in the hard reinsurance market, as well as an expected decline in COVID-19 claims, higher interest rates and cost discipline.

Overall, Swiss Re reported US $472 million of net income for the Group in 2022, with a return on equity (ROE) of 2.6% for the full-year.

However, Q4, which was lighter in terms of losses, it appears, saw US $757 million of net income produced just in the fourth quarter.

Overall, the full-year 2022 result compares with a net income of US $1.4 billion and an ROE of 5.7% for 2021.

“The decline was driven by the impact of economic inflation on actual and expected claims in the property and casualty businesses, mark-to-market impacts on listed equity investments and large natural catastrophe claims above expectations,” the company explained.

Net premiums written and fee income earned rose by almost 1% to US $43.1 billion for the year, which at stable foreign exchange rates would have represented 5.3% premium growth.

P&C Re saw a strong Q4 with US $595 million of net income, again demonstrating that in lighter loss quarters Swiss Re’s results can soar.

The setting of US $1 billion of P&C reinsurance reserves to combat inflation dented the business this year, and it’s interesting to note that very few companies have revealed their actions to strengthen their businesses and to catch up with inflation in this way.

Large natural catastrophe claims reached an above target US $2.7 billion for the year, which Swiss Re said were mainly due to Hurricane Ian, floods in Australia and South Africa, hailstorms in France, winter storms in Europe and the US as well as smaller events.

Net premiums for the P&C Re business increased slightly to US $22.0 billion, supported by continued price improvements, which at stable foreign exchange rates would have been 4.1% growth.

At the January 2023 reinsurance renewals, Swiss Re has targeted growth, with a 13% increase in volumes underwritten, compared with the volume of business up for renewal.

In fact, Swiss Re grew its natural catastrophe book 21% at the January 2023 renewals, as it targeted expansion into the harder market environment.

As we stated at the start of this article, Swiss Re explained that its P&C Re division achieved a price increase of 18% at the January renewal, citing improved rates in all lines of business.

Swiss Re said that, “This more than offset higher loss assumptions of 13%, which reflect a prudent view on economic inflation and loss model updates.”

Which is interesting, as it suggests rates running ahead of both inflation and loss trends, perhaps reflecting a market currently pricing at a level more than adequate to keep up with those trends.

Importantly though, while pricing may run ahead of trend, companies still need to catch up to the inflation trend, which can only be done through the type of reserving actions Swiss Re has taken last year.

The new and higher prices alone cannot be relied on to stick for long enough for them to compensate for past inflation that may not have been accounted for fully in the business underwritten in the past.

It’s perhaps also notable that price trends running ahead of loss trends suggests the reinsurance market could soften somewhat, or at least stabilise, as there may be a margin for reinsurers and ILS fund pricing to come down to get closer to trend.

For those with longer-tailed books though, it is going to be important to consider and deal with the inflation that may not yet have been accounted for.

Another pleasing piece of the result for Swiss Re will be a profitable Corporate Solutions, delivering US $486 million of net income for 2022 at a combined ratio of 93.1% and with 2.6% growth in net premiums written, all despite impacts from losses and the war in Ukraine. Here, US $100 million in reserves to combat inflationary effects were added.

With a US $3 billion net income and sub-95% combined ratio target for 2023, the company has every chance of delivering stellar results, given the higher pricing levels being achieved and the actions it has been able to take to reduce any inflationary effects coming through its claims.

CEO Christian Mumenthaler commented on the year ahead, “2023 has started well, with successful January renewals reflecting our ambition to drive profitability and create value for shareholders, while continuing to support clients. Our investment portfolio is well-positioned to benefit from rising interest rates, and we do not expect a return of high COVID-19 claims that we had seen over the past years. Despite the uncertain macroeconomic environment, we are confident in the Group’s ability to deliver on the new ambitious targets.”