Swiss Re AG (OTCPK:SSREF) Q3 2022 Earnings Conference Call October 28, 2022 2:30 AM ET
Company Participants
Elena Logutenkova – Head, Media Relations and Corporate Reporting
John Dacey – Chief Financial Officer
Conference Call Participants
Ben Dyson – S&P Global Market Intelligence
Thomas Hengartner – Finanz und Wirtschaft
Operator
Ladies and gentlemen, welcome to the Nine Months Results 2022 Media Conference Call. I am Alice, the Chorus Call operator. I would like to remind you that all participant will be in listen-only mode and the conference is being recorded. The presentation will be followed by Q&A session. [Operator Instructions]
The conference must not be recorded for publication or broadcast. At this time, it’s my pleasure to hand over to Elena Logutenkova, Head, Media Relations and Corporate Reporting. Please go ahead, madam.
Elena Logutenkova
Thank you, and good morning, everyone. Thank you for joining our media call and nine months results for 2022. I am joined today by our Group CFO, John Dacey, who will give you a brief overview of the results and then we will take your questions.
With that, turn over to you.
John Dacey
Thank you, Elena, and good morning to everyone. The first nine months of 2022 were marked by multiple challenges, in particular, the turbulence in the financial markets, an increase in natural catastrophe claims, surge in inflation and the war in the Ukraine.
As a result, we reported a Group net loss of $285 million for the period. The loss in the third quarter was $442 million, which we indicated with the pre-announcement two weeks ago. Nevertheless, we remain confident in our midterm outlook, particularly encouraged by several key developments.
First, both Life and Health Reinsurance and Corporate Solutions are performing very well and are on track to meet their targets for the year.
Second, we are seeing the positive effects of rising interest rates, which are already helping to compensate for the impact of higher inflation and will be an important lever for the profitability of the group going forward. The Group’s recurring income yield increased to 2.4% in the first nine months of 2022 from 2.2% for the same period last year and the trajectory is clear.
In the third quarter, we achieved a 2.8% recurring yield. If we look at the fixed income reinvestment yield, it increased markedly to 4.1% in the third quarter. This translates into a year-on-year increase in the recurring contribution from our fixed income yield portfolio of around $100 million this quarter alone.
And third, our capital position remained very strong, with a Group SST ratio of 274% as of the 1st of July 2022. This enables us to capture profitable opportunities in the upcoming renewals while remaining committed to our capital management priorities.
Now let me turn to the results for the individual businesses. Property and Casualty Reinsurance reported a net loss of $283 million for the first nine months of 2022, impacted by natural catastrophes and lower investment results.
At $2.5 billion, large natural catastrophe claims in the period were higher than expected and mainly related to Hurricane Ian, floods in Australia and South Africa, hailstorms in France, as well as a series of other smaller events around the world.
Net premiums earned increased slightly to $16.6 billion, supported by continued price improvements. Calculated at stable foreign exchange rates, the increase in net premiums earned amounts to 4.4%.
P&C Re’s normalized combined ratio was 96.2% in the period. Due to an increase in small and midsized claims, and driven mostly by economic inflation, the business is unlikely to reach its normalized combined ratio target of less than 94% in 2022.
Turning to Life and Health Reinsurance, the business segment reported a net income of $221 million for the first nine months of 2022. While the first quarter of 2022 was strongly impacted by COVID-19-related claims, the business returned to profitability in the second and third quarters despite significantly lower investment results this year. Overall, COVID-19 claims for the nine-month period amounted to $608 million, with a vast majority booked in the first quarter.
Net premiums earned and fee income remained largely unchanged at $11.2 billion. Calculated at stable foreign exchange rates, the increase of net premiums earned amount to plus 4%. Life and Health Re is on track to meet its target of approximately $300 million in net income in 2022.
Now looking at Corporate Solutions, the business unit achieved a net income of $356 million in the first nine months of 2022. The continued solid results confirmed improved resilience of the underlying business and was achieved despite reserves related to the Ukraine war and large natural catastrophe losses, including Hurricane Ian.
Net premiums earned increased by 4.6% to $4.1 billion, driven by new business growth in selected focused portfolios, along with continuous earn-through of previously realized rate increases. Calculated at stable foreign exchange rates, the increase in net premiums earned amounts to 9.2%. Corporate Solutions combined ratio of 93.1% for the first nine months of 2022 is well on track to reach the full year target of less than 95%.
And finally, let me also touch on the iptiQ results. In the first nine months of 2022, iptiQ continued its dynamic growth trajectory. Compared to the prior year period, the business increased its gross premiums written by 25% to $650 million with growth being achieved across all regions.
To sum up, while P&C Re has been impacted by elevated claims activity, all other businesses are performing well. We remain confident in the mid-term outlook of the Group and we are committed to our 2024 profitability targets, although the Group targets for 2022 are unlikely to be reached.
We see increased demand in risk protection around the world, and our strategy and very strong capitalization puts us in a favorable position for the upcoming renewals amid rising prices and constrained market capacity.
And with that, I’d like to hand it back to Elena to manage the questions.
Elena Logutenkova
Thank you, John. We will now open the line for questions. Operator, could you please take the first question?
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from the line of Ben Dyson with S&P Market — Global Market Intelligence. Please go ahead.
Ben Dyson
Hi. Good morning. Thanks for taking my question. Yeah. I just wanted to ask whether your catastrophe experience in the year or the quarter was going to prompt any change in your approach to catastrophe reinsurance given that I think Swiss Re was one of the companies that certainly was going to continue to grow in catastrophe while others were cutting back? And just a second question really just around Hurricane Ian specifically and whether you are expecting any development in that $1.3 billion loss figure you gave, just given that claims can develop in Florida, in particular.
John Dacey
Thanks for the question, Ben. Let me start with Ian and then I will respond to the broader question about natural catastrophe. We believe the $1.3 billion that we have reserved in the third quarter is actually a very prudent position.
We put the reserves up given fairly limited information coming from the marketplace. The fact of the matter is that the hurricane occurred only two days before the end of the quarter, exactly one month ago from today, and as a result, the actual information from our primary insurance clients was very limited.
Having said that, the models that we use both to estimate our exposures and potential losses are well-developed and we feel comfortable. You alluded to the reality that in Florida, in particular, that has been what is sometimes referred to as creep of losses where uncertainty around the distinction between wind loss and flood loss, and the strong intervention of lawyers in trying to increase recoveries has caused some recent storms to cost considerably more than originally identified.
We think both our industry loss, which is a range between $50 billion and $65 billion, and our specific loss for Swiss Re $1.3 billion reflect all of these factors and is likely to cover the reality that comes out over the coming quarters.
With respect to the broader question on natural catastrophes, yes, we believe that this is an important part of the future of Swiss Re’s business. We remain committed to providing capacity at the right price and in within the right structures to our clients. We think there are clear adjustments that need to be made in terms of the retentions that is the skin in the game that the primary clients put for some of these positions.
But we are prepared to work with our clients through the renewals in 2023 to be sure that we get to an adequate sharing of risk and an adequate pricing of the risk that we assume. But in general, we remain very much committed to this segment of the reinsurance market not just in North America but around the world.
Ben Dyson
Okay. Thank you very much.
Elena Logutenkova
Thanks and let’s take next question, please?
Operator
The next question comes from the line of Mark Hoffman with AWP [ph]. Please go ahead.
Unidentified Analyst
Yes. Good morning, John. My question goes to the January renewals, and first, what do you expect? You have said that you are trying also to give more capacity into the market, do you expect in January already some more of growth and growth initiatives? And secondly, on your $700 million on the inflation side, you took on the risk side. Is this mainly related to P&C and to the probably evolving costs that claims cost that you see there in the future?
John Dacey
Sure. So, on your first question, I think, we see a true market dislocation in reinsurance broadly and natural catastrophe specifically. And it’s clear that among other things the inflation, which I will reference in just a moment, has increased asset values around the world, increased the amount of protection that’s required by those asset owners from their primary companies and increase the amount of exposures that the primary companies would like to reinsure.
It’s not obvious that we will actually increase in any meaningful way our overall exposure. What we will be is a committed participant in this space. As we go forward, we will work with clients that are willing to acknowledge the underlying risks and the appropriate prices.
But I would expect a material increase in that pricing and I would expect a material increase in the retentions of risk by primary companies as we move forward. The economics of the reinsurance industry has been challenged over the last five years.
I think it’s clear to all that we would not just expect but require better expected returns on the business we write, and therefore, the discussions with our clients are, in some ways, reflecting that reality, but are likely to leave some people unhappy with the amount of price increase that we believe is appropriate in this moment. So we will see where the January 1 renewals go, but it will be challenging, broadly speaking and especially with respect to anything touching the Florida market, I expect.
On the inflation adjustments, you picked up that since the end of last year, we have actually been systematically increasing our reserves to reflect the fact that the ultimate loss costs are going to be higher than what might have been expected in the earlier part of 2021, and even frankly, at the beginning of 2022.
This reflects a series of businesses. Clearly, it’s been obvious, I think, to all observers, not just those in the insurance sector, that the replacement costs for and repair costs for motor has increased materially.
Property repairs and replacements, more generally, up the overall CPI inflation is one of the factors, but also other dimensions of economic inflation, including the wage inflations that we are starting to see in some markets are material and we are adjusting our view of what ultimate cost will be appropriately and making these adjustments in our own accounts as we go forward to stay ahead of the game.
A lot of this is based on assumptions rather than actual experience, but we are comfortable that we are in good shape. This will continue to be monitored, and if further adjustments are required, we will make them, but right now we feel very comfortable with where we are.
Unidentified Analyst
Thank you.
Elena Logutenkova
Thank you, Mark. Let’s take next question, please?
Operator
The next question comes from the line of Rico Kochar with Miller.ch [ph]. Please go ahead.
Unidentified Analyst
Hey. Good morning and Thank you very much for having my questions. I have three small questions. The first one is, looking on your equity, its 50% down to $11.9 billion. How would you like to operate with an equity in a single-digit billion dollar level? That’s the first question. The second one, do you plan any capital increase? And the third one is, can you evaluate a little bit about the models, SST signals everything is okay and the reinsurance nat cat models also say — sign this business, but when you look at the nat cat results in this year with Hurricane Ian, so it must be a little bit more cautious behavior for writing the business. So that — can you evaluate this model view a little bit more?
John Dacey
Sure, Rico, so let me go through the questions in order. You are absolutely correct. On a U.S. GAAP reported shareholders’ equity basis, we have come down to about $12 billion. The reality is, this accounting framework makes adjustments on the asset side of the balance sheet. So when interest rates go up, the fixed income portfolio that we have is valued lower as a mathematical certainty.
We are not concerned about that in the context of we actually match our assets in duration to our liabilities. Unfortunately, the accounting standard does not adjust the liabilities in a corresponding way.
But it’s precisely the economic view that is the basis both for the way we think about our business and the way that we think about, frankly, our capital position and that’s why the SST ratio is so robust at midyear at 274%. Since then even moving above that rate, we are very comfortable that we have the capital that we need.
And in fact, in the slide that you will see we have got a slide which indicates in the accounting regime, which we are moving to IFRS 17 in 2024, that the shareholders’ equity will have a better reflection of that economic capital as we report starting in January 1, 2024, with a new balance sheet that gives us the appropriate credit for matching assets and liabilities and reinforcing the fact that we don’t speculate on trying to make money off of duration matches. So we are very comfortable there.
And as a result of that, your second question, a very quick answer, there’s no indication or consideration of any capital raises. We have got the capital we need to actually write even more business in a very attractive marketplace.
Your last question about models, I think, it’s important to understand that we don’t have a model. We have got literally over 100 specific models for specific catastrophe exposures around the world. We constantly update these and review whether we are seeing one any particular implications of climate change on the risks, both the frequency and severity of potential losses. And secondly, are we seeing any reason to further adjust the loss cost based on some of the inflationary impacts across the world.
And so those model adjustments are continuous. I think a great example would be after the typhoons in Japan in 2018 and 2019, we saw that the impact of flooding related to the wind damage was huge and not properly modeled based on climatic realities.
And so we made those adjustments, we work with our primary companies to explain to them why their reinsurance was going to be more expensive and why they needed to charge more in the primary market as well and that helped us get to a new equilibrium, which subsequently has performed very well for us.
So if there’s something that’s needed with respect to windstorm in North America, based on what we have seen now with Hurricane Ian, we will make those adjustments. Right now, I’d say that a Category 4 hurricane with winds of 240 kilometers an hour is not unknown, but it’s a very big storm.
And so the fact that this is a $50 billion-plus industry loss should not be a surprise to people. It’s not a surprise to us. It’s a chunky loss in the quarter. It’s a big loss for the year. But we will get through this and make sure that the pricing that we have received from our primary clients on a going-forward basis reflects the risks appropriately.
Unidentified Analyst
Very interesting. Thank you very much.
Elena Logutenkova
Thank you, Rico. Let’s take the next question, please?
Operator
[Operator Instructions] The next question comes from the line of Thomas Hengartner with Finanz und Wirtschaft. Please go ahead.
Thomas Hengartner
Yes. Good morning. Equity is down to $12 billion around, you just mentioned that per share that’s about $41 that you calculated and said in your papers. The dividend last year was CHF5.90. So I wonder whether that your capital position allows for a further CHF5.9 dividend next year?.
John Dacey
Yes. So we have been very clear in our capital management framework, right? The first objective is to remain a very well-capitalized company. I think we believe that’s absolutely the case, and again, our point of reference is our economic capital that’s correctly reflected in the SST ratio.
The second is can we put that capital to work in writing new business. We see major opportunities and so we do not feel any constraints other than there may be some specific peak risks that will allow us to take advantage of what we think is a very attractive marketplace.
The third is to increase or at least maintain the dividend, and again, on an economic basis and outlook of our businesses where we have reconfirmed our financial targets for 2014, we don’t see any reason to reevaluate the indications that maintaining that dividend would signal.
So at this point in time, I don’t think we should consider, again, this U.S. GAAP implications of the unrealized losses in our fixed income portfolio, which we do not trade to be a reason to adjust those capital initiatives as we go forward.
The fact that the SST ratio has — is well above the top of our range, 274% compares to the range that we have put out there, 200% to 250%, I think might lead some, frankly, to suspect that there could be additional capital moves.
I don’t think that is in the cards at the moment in part because the increase in interest rates — the same increase in interest rates, which has created this issue on the U.S. GAAP reporting has assisted the increase of our SST ratio.
And we don’t take credit for that necessarily. We believe we are extremely well capitalized, and therefore, have capital flexibility. But I don’t think extraordinary capital returns to shareholders is likely to be in the cards.
Thomas Hengartner
Thank you.
Elena Logutenkova
Thank you, Thomas. Let’s take next question, please?
Operator
The next question comes from the line of Maria Haftonaya [ph] with Bloomberg. Please go ahead.
Unidentified Analyst
Hi. Morning. So just a quick one for me. I am trying to get a better sense of your guidance for 4Q and for full year with this unexpected 3Q loss. Is there anything you can tell us a bit more about that, whether you are still seeing claims coming in for the hurricane season that will hit Q4?
John Dacey
So we have actually not given any specific guidance for the fourth quarter. What I can say is, on the hurricane itself, we believe that the $1.3 billion is a secure estimate of ultimate cost and so even if new information comes in from clients during the course of this quarter, we think our reservations that were done in Q3, the $1.3 billion are adequate to cover any subsequent notifications that come through.
I can’t predict that there will be no further hurricanes, although, we are pretty close to the end of the season. There are other natural catastrophes around the world which might or might not come through. We do have a budget where we expect some losses in the nat cat field and at the moment, that’s a robust number of more than $0.5 billion of expected losses if those losses incur then we are fine.
If they are smaller than that, we are better than fine, and if they are bigger, then we will work through the same way that we have worked through other quarters. But right now there is no indication of any major losses through the first month of the fourth quarter.
Unidentified Analyst
Okay. Thank you.
Elena Logutenkova
Thanks, Maria. Let’s take next question, please.
Operator
The next question comes from the line of Jonas Talber with Toshijo Usmoniter [ph]. Please go ahead.
Unidentified Analyst
Yes. Good morning. And for me, on Ian or just nat catastrophe losses, I didn’t see how it’s like divided on the different nat cats. So the $2.7 billion for the first nine months, could you give how much is your right now and the other catastrophes and how much came additional in the third quarter, that would be great? And maybe on the German auto insurance market for me, can you — do you have any expectation how much prices have to rise in this sector for your clients, that would be great? Thanks.
John Dacey
Yeah. So the — as you say, overall, we have listed $2.5 billion of losses coming through, by far Ian the major event there. In addition, there are major floods in Australia in the first quarter, which now for us are an event of over $400 million, there were major storm losses, including hail losses in France in June, another big loss flooding in South Africa, some February storms in Europe, including Northern Europe and Germany.
You go through the list and decreasing size. I think our view is a lot of this is our business. We expect significant losses, it’s just the totality of this year has created an outsized loss, which for the absence of doubt remains a $2.5 billion below the premiums that we have received for the — our nat cat portfolio.
So the depending on what happens in the fourth quarter, we will see what the ultimate combined ratio is for nat cat, but at the moment, while it’s higher than expected, it’s lower than the premiums that came in the door to cover these losses.
So we will sort out at the full year where we are. But I think, again, this is our business. We will have years like this where it’s higher than expected. We will have years like 2021 where it’s actually lower than expected.
With respect to the German auto market, this is a market like pretty much all motor markets in the world where the claims cost has risen higher than any expectation when policies were written.
I think you will have to speak to the primary companies in your market to understand their expectations for how far they need to adjust their premium rates to get to a new equilibrium that reflects the cost of repair and the cost of replacement. But this is exactly what we have addressed when we say that we have made adjustments on a global basis of $700 million for inflation.
These businesses which are just going to be more expensive to deliver the benefit of insurance to clients and so we expect these to be reflected also in the premiums of the primary companies, but certainly in the reinsurance costs that they pay us on a going forward basis.
We have made material increases. We acknowledged at the July 1 renewals that our prices were up 12%, but our expected costs were up 12% as well and that gives you an indication of the magnitude of some of these inflationary adjustments that are required.
Unidentified Analyst
Thank you very much.
John Dacey
Thank you.
Elena Logutenkova
Thank you, Jonas. Let’s take next question, please?
Operator
[Operator Instructions] We have a follow-up from Mr. Dyson with S&P Global Market Intelligence. Please go ahead.
Ben Dyson
Yeah. Thanks for taking the follow-ups. Just a quick one really on the January 1 renewals, I was just wondering, if you mentioned that prices would have to go up and some seasons might be unhappy with the level of increases. I was just wondering if you could give any indication of what types of increases you are expecting or what sort of order of magnitude you are expecting there? And then just another quick one as well, there have been reports from some of my colleagues elsewhere in the press that the Boeing 737 MAX claims have moved out, because of a significant increase in the liability portion of that claim. I was wondering if you could say what Swiss Re’s exposure to that is.
John Dacey
So on the first question with respect to January 1 renewals, I think, it’s important to understand that what we see in the marketplace, which includes not just fatigue, but frustration from third-party capital and the ILS marketplace, which includes all preannounced or pre-Ian announced reduction of capacity by a number of reinsurance participants in the nat cat space and reflects a, what I mentioned earlier, which is increase in asset values broadly and an increase in demand from the primary companies to get cover for large events means that we have a disequilibrium and a classic supply/demand imbalance in January 1.
And my expectation is prices will not show some sort of an evolutionary adjustment, but rather a fairly radical adjustment up to reflect the risk that is being transferred on these tail events. We think we have a good view of what an appropriate price is and we are in discussions with the clients to make sure that they understand our models for increased loss cost expectations, but also the margins that we would expect to be on top of that as we go into 2023.
With respect to your second question, we can’t comment specifically on any individual corporate loss, but I can say that the Asian industry insurance and reinsurance for all risks is also in disequilibrium based on the magnitude of losses, which seem to becoming true and we will sort out what this might mean for future exposures and future prices.
Ben Dyson
Okay. Thank you very much.
Elena Logutenkova
Thanks, Ben. Let’s take next question, please?
Operator
There are no more questions at this time. Back to you for closing remarks.
Elena Logutenkova
All right. Thank you very much everyone for joining the call today. If you have any further questions please reach out to Media Relations. Thank you. Good-bye.
John Dacey
Thank you. Good-bye.
Operator
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Good-bye.
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