by
William Arnold | May 09, 2013
Last week Swiss Re released their results for the quarter ended March 2013. The Group reported very strong results with net profit increasing 21% to $1.4bn (note all figures in this article are in USD) largely due to the absence of large natural catastrophe events as well as ability to maintain an exceptionally strong combined ratio.
The table below summarises the financial highlights:
The very strong net income of $1.1bn (compared to $660m in the corresponding period) in the Non-Life division stemmed from two main drivers:
- Volume: Swiss Re managed to increase premiums by 15.1% to $3.6bn in P&C Reinsurance and by 15.4% to $613m in Corporate Solutions (as a result of the expiry of the P&C quota-share with Berkshire Hathaway). This level of strong growth therefore is a one-off and not expected to continue.
- Margin: Swiss Re had an exceptionally strong underwriting performance during 1Q13, which led to a combined ratio of 72.4%. The improvement was due to (i) the absence of large natural catastrophe and (ii) favourable prior year reserve development of 8.2 points and 3.1 points for its P&C Reinsurance and Corporate Solutions divisions respectively. Again this is more of a one-off and therefore this trend is not expected to continue.
Growth in premiums came from high growth markets such as Africa and emerging Asia. Natural catastrophe prices for US and Japan peak risk were slightly lower, but remained at a good level according to management.
Life and Health reinsurance grew much more modestly by 6.4% to $222m driven by growth in premiums from Health (+18.6%) in Europe and Asia.
Swiss Re looks to be reaping the rewards of the economic conditions and regulatory changes facing both banks (i.e. Basel III) and insurers (i.e. Solvency II) that encourages those financial institutions to seek to remove assets/risk from their balance sheets via reinsurance, creating a very attractive environment for Swiss Re to grow and cherry pick high yielding business.
Swiss Re's investment portfolio quality remains strong: it has little exposure to stressed European sovereign debt and impairments amounted to only $12m during 1Q13. According to management, duration is largely matched, suggesting management does not expect an interest rate increase in the near future.
Swiss Re's capital structure remains strong, but we note that it suffered from a $446m net decline in unrealised capital gains YE12. However, during the period, Swiss Re issued $750m of subordinated contingent write-off loan notes which increased total hybrid capital from $4.3bn to $5.0bn.
Swiss Re did not mention how much excess capital it has compared with S&P's AA rating level (which was $10bn at YE12). However the Group has a Swiss Solvency Regulatory ratio of 245%, more than double the regulator’s requirement.
Conclusion
Swiss Re continues to perform very strongly since the GFC. The profit and loss and balance sheet is back to pre-GFC strength and the market outlook remains positive.
With respect to the Swiss Re Tier 1 hybrid securities we continue to believe they represent amongst the most compelling risk-return investments in the market despite the very strong rally over recent months. Swiss Re Tier 1 securities are rated two to three notches above listed Tier 1 hybrid securities issued by the major banks, however they continue to trade wider due to the market’s perception of call risk and exposure to Europe, both of which we believe are overstated. Moreover, we prefer the structure of the “old style” Swiss Re Tier 1 hybrid securities to the more equity like “new style” listed bank hybrids. We also view Swiss Re as a far superior credit compared to AXA SA.