Swiss Re AG (OTCPK:SSREY) Q1 2024 Earnings Conference Call May 16, 2024 2:30 AM ET
Company Participants
Elena Logutenkova – Head of Media Relations and Corporate Reporting
Christian Mumenthaler – Chief Executive Officer
John Dacey – Chief Financial Officer
Conference Call Participants
Joshua Geer – InsuranceERM
Nathalie Olof-Ors – Agence France Presse
Ben Dyson – S&P Global Market Intelligence
Tom Sims – Reuters
Operator
Ladies and gentlemen welcome to the First Quarter 2024 Key Financial Data Conference Call. I am Sandra, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. (Operator Instructions)
At this time, it’s my pleasure to hand over to Elena Logutenkova, Head of Media Relations and Corporate Reporting. Please go ahead, madam.
Elena Logutenkova
Thank you. Good morning, everyone. Welcome to our media conference call for the first quarter results of 2024. I’m joined today by our Group CFO, John Dacey and he will give you a brief overview of our results and then we’ll be happy to take your questions. John, over to you.
John Dacey
Thank you, Elena and good morning to everyone. Swiss Re had a strong start to the year, achieving a net income of $1.1 billion. All our main businesses contributed to this result, reflecting our continued underwriting discipline, strong return on investments and effective management of operating expenses.
This is the first quarter when Swiss Re is reporting results under IFRS after transitioning from U.S. GAAP as of the 1st January of this year, so prior period results for the first quarter of 2023 are not directly comparable. Insurance revenues for the group reached $11.7 billion in the quarter, while the insurance service result, which reflects the profitability of our underwriting activities, amounted to $1.4 billion. In asset management, Swiss Re achieved a return on investments of 4% in the first quarter, driven by continued increases in recurring income.
Now let’s turn to the results for the individual businesses. Property & Casualty Reinsurance reported a net income of $552 million for the first quarter, driven by the disciplined underwriting and low natural catastrophe experience in the current period. P&C Re achieved an insurance revenue of $5 billion, an insurance service result of $704 million and a combined ratio of 84.7% in the first quarter. As a reminder, the business targets a combined ratio below 87% for the full year.
P&C Re also achieved good results in the April 2024 renewals. The business renewed contracts with $2.5 billion in treaty premium volume, which represents a 6% volume increase compared with a business that was up for renewal. Overall, P&C Re achieved a price increase of 12% in this renewal round. Based on the continued prudent view of inflation and updated loss models loss assumptions also increased by 12%.
Turning to Life & Health reinsurance, the business unit reported a net income of $412 million for the quarter. This reflects U.S mortality experience in line with expectations and a strong investment result driven by increased yields. Life & Health Re achieved an insurance revenue of $4.8 billion, an insurance service result of $434 million. The business continues to target a net income of approximately $1.5 billion for the full year 2024.
Now, looking at Corporate Solutions, the business unit reported a net income of $194 million for the quarter. The result was driven by continued disciplined underwriting, lower than expected man made losses and a strong investment result also here. Insurance revenues for the first three months of 2024 were $1.8 billion, benefiting from good rate environments in most segments and new business growth. Corporate Solutions achieved an insurance service result of $213 million and a combined ratio of 89.9% for the first quarter, while targeting a combined ratio below 93% for all of 2024.
Finally, let me touch on iptiQ. We announced this morning that following the strategic review of iptiQ, we plan to withdraw from this business in a manner and the timeframe that maximizes value for the Group subject to applicable regulatory approvals and notifications. The reason for this decision is that the market environment now is vastly different from the one when iptiQ was created. Given these changed conditions and the Group’s strategic priorities, we therefore concluded that we are not the best owners going forward of this business. In this regard, we are considering options for the different iptiQ entities. To sum up, Swiss Re had a positive start to the year and we continue to focus on our 2024 financial targets, including a Group net income of more than $3.6 billion.
And with that, I’ll hand it back to Elena.
Elena Logutenkova
Thank you, John. I think we can open the lines for questions now. Let’s take the first question, please.
Question-and-Answer Session
Operator
(Operator Instructions) The first question comes from Joshua Geer from InsuranceERM. Please go ahead.
Joshua Geer
Hello, can you hear me?
Christian Mumenthaler
Yes, we can.
Joshua Geer
So, with Swiss Re transitioning to reporting under IFRS, what metrics were showing the key differences from last year and what, as you said, was sort of best representing Swiss Re’s results?
Christian Mumenthaler
Well, I think for our Property & Casualty businesses, the combined ratios continue to be key KPIs for demonstrating the underlying quality of the business and here we’ve set out very explicit targets for full year. And you saw that both Corporate Solutions and Reinsurance were able to achieve in the first quarter a better result than those targets. And that would have been true as the key KPIs under U.S. GAAP. It’s true under IFRS. So I think that’s the first case.
The second is the development of the net income, where especially in our Life & Health business, we show a stronger profit recognition for the book that we have in force that we built up literally over the last 40 years, and that earning coming through allows us to have a much stronger target for Life & Health. In 2023, our target for net income in Life & Health was $900 million. It’s 1.5 billion for 2024. And again, we seem well positioned after the first quarter to achieve that target.
Overall, the group’s net income is up 20% from our target of last year at $3 billion to a $3.6 billion target. The fact that we’re going to IFRS as an accounting standard doesn’t change the underlying economics of the business, but does change in some cases the way profits are recognized. And again, I think we’re very comfortable that that 20% increase year-on-year is an impressive adjustment to our ability to continue to run our various businesses in a highly profitable way that provides an adequate, actually more than adequate, return on equity for the Group and for our shareholders.
Joshua Geer
Brilliant. Thank you so much.
Operator
The next question comes from Nathalie Olof-Ors from Agence France Presse. Please go ahead.
Nathalie Olof-Ors
Hi. Thanks for taking my question. I would like to see if you would have an estimate for the Baltimore Bridge and if you see vulnerabilities elsewhere around the world, around massive bridges like this, or if you think that, I mean, should the sector do a review of point of weaknesses, is it something that’s worrying you, is it something that could be seen some elsewhere in the world? And for iptiQ, could you explain us what changes, what changed, because it’s a relatively new business, what changed during this short time now?
Christian Mumenthaler
Sure. I’m happy to answer both questions. So with respect to the Baltimore Bridge, this was a first quarter loss for our P&C Re business. Corporate Solutions was not on risk in any material way for that loss. In P&C Re, our gross loss was approximately over $100 million after some reinstatements on the reinsurance premiums, the net loss booked was closer to $75 million. So I think overall, this is a material loss for the industry.
We are a major insurer of infrastructure around the world, and we continue to evaluate with a risk engineering team the nature of these risks and what we might learn from any accident like this as it plays itself out. I don’t think that we view this as an indication of an elevated risk compared to what we believed we knew. We do think that there will undoubtedly be some adjustments by the people owning infrastructures, having seen the vulnerability the bridge had to this incident.
With respect to iptiQ, your question is what’s strange in the intervening years? I think fundamentally, it’s important to understand that we built iptiQ internally as an option where we believed that there was a challenge or a potential challenge by technology, broadly what was sometimes referred to as Instech, to reshape parts of the market. And so we wanted to be sure that we explored that option and saw what was possible for a possible way for Swiss Re to participate in what was a B2B2C platform. The reality is the uptake of demand for the capabilities of that platform was probably lower than we might have expected, at least that we could have imagined in that option.
And the other thing I’d say is the underlying opportunities for our core businesses of large commercial insurance and reinsurance have been much better than we might have thought seven, eight years ago. And in that context, this is about making sure that we are able to make the best of the investments that we’ve made in iptiQ, at the same time refocusing management attention and ultimately our capital on our core activities that have a very bright future in front of us.
Nathalie Olof-Ors
Can you just explain me the figures for the Baltimore Bridge? I’m not sure I understand how much this did cost you.
Christian Mumenthaler
Yes, so rough numbers. The gross loss to Swiss Re Property & Casualty Reinsurance would have been about $100 million, the net loss, closer to $75 million, $77 million to be precise.
Nathalie Olof-Ors
Thank you, sir.
Operator
The next question comes from Ben Dyson from S&P Global Market Intelligence. Please go ahead.
Ben Dyson
Oh, hi, good morning. Yes, I’ve just got a question about reserving in P&C. You mentioned in the presentation that there was some reserve additions for prior year large events and also for pre-2020 U.S. casualty. I was just wondering if you could say how much that was. Obviously, you can see the experience variance, but not what the actual reserve edition was, because that’s the net figure, I think. And if you could break it down, as in how much was for prior year large events and what they were and how much was for U.S. casualty? Thanks very much.
Christian Mumenthaler
Yes, Ben. Thanks for the question. We’re actually not providing a great amount of detail here. What I can say is, one major market event, which you probably heard some other people speak about, was an increase in the reserves related to summer storms, flooding and hailstorms in Italy, where, based on information that was received in the first quarter from our cedent clients, we’ve adjusted the estimate for the industry loss up from $3.3 billion to all the way to $6 billion. And as a result of that increase of the industry loss, we booked a gross number of over $100 million additional for this loss. We think that’s well reserved. We don’t expect any subsequent deterioration from that, but that was one chunk.
We also had some important manmade losses where we had a new assessment based on internal modeling, of what potential risks were for some, a finite but clear set of manmade losses that allowed us to put aside some additional reserves in the expectation of an ultimate cost that was higher than where we had been sitting. And then, yes, we referred to some of the challenging years in U.S. casualty pre-2020, which we also took the opportunity to reinforce. This is in part in the same quarter, whereas we’ve been very explicit. The Nat cat losses were benign and very different than a year ago, when we were reserving more than $400 million for the earthquake in Turkey in the first quarter of 2023.
Ben Dyson
Okay, thank you very much.
Operator
The next question comes from Daniel Zulauf from (indiscernible) Zeitung. Please go ahead. Good morning.
Unidentified Analyst
Good morning. Thank you. I have two questions. The first one on iptiQ. Can you give me the loss this entity has produced during 2023 and in the first quarter and how you expect to exit this business? Are you expecting to sell it? Do you think you can find a buyer for it? Are you going to shut it down? What does it entail in terms of employees? Give us, please, a bit more color on the end of iptiQ?
And the second question is simply, you’re saying now that IFRS is giving you the opportunity to show much better than before the real value of your business, et cetera. My simple question would then be, why did you opt for U.S. GAAP in the first place, then?
John Dacey
Sure. So let me answer second question first. The IFRS actually changed fundamentally their standard a year ago, where most of the European markets that we are compared to made that transition as of January 1, 2023. The previous version of IFRS, I would argue, was not nearly as insightful in terms of the underlying economics as the business as this new version, which sometimes referred to as IFRS 17.
And so our decision to migrate from U.S. GAAP to IFRS was fundamentally linked to this major revision of the IFRS accounting standard that came online last year, because we were under U.S. GAAP, we had some flexibility in exactly when we made the transition and so we’ve gone ahead and done this as of January 1st this year. So I think that’s the issue. The Group’s original adaption of U.S. GAAP dates back more than 20 years and certainly before my time as CFO. So I can’t help with a great logic for why that was available. But again, the standard that we’re now on was not an option at that time.
With respect to iptiQ, it’s important to understand iptiQ has a number of different businesses across Europe and the U.S. These businesses are run under an umbrella leadership, but would have their own specific capabilities, and frankly, they’re in different stages of development, some further along than others. Exactly what we do with each of them is being sorted out. We believe there is unambiguous value inside the Group of businesses. Some of them may well be of interest to potential acquirers. We say explicitly we don’t believe we’re the best owners of these activities.
Other people may be much better owners. And so over the coming quarters and in some cases maybe even years, we’ll evaluate what’s possible. But in the meantime, we’ll be very consequent in managing these in a way that limits the downside to the Group and maximizes any potential upside that we might see across the businesses.
With respect to employees, I don’t think there’s going to be a dramatic impact immediately. Over time, we’ll have to sort out what the best answer for all stakeholders will be, and that’s how we’ll go about this.
Unidentified Analyst
The figures you told me last year that you were expecting in 2023 a loss of $250 million. I guess this has turned out higher. Otherwise you might not have decided to shut down or to sell or whatever you’re going to do with it. Maybe you can elaborate a bit on the figures?
John Dacey
The 2023 number was, as you say, a loss of approximately $250 million as we were building this business out again across multiple jurisdictions, the expected performance in 2024 was for a smaller loss. As we continue to improve the business, that directionally is where the business is heading. There may be some charges related to this restructuring in coming quarters, but overall, there’s nothing dramatically bad happening in the underlying numbers.
It’s just that we came to the conclusion that we had better places to invest in our core businesses. And so shutting this down one way or another, either through potential sales, and we’ll see what’s possible. Managing the business tighter for those activities which are very close to breakeven and potentially putting into runoff those that are very far from breakeven, is the way we’ll go forward here.
Unidentified Analyst
What is the value of the business in your balance sheet at the moment? What is — if you are talking about potential depreciations?
John Dacey
So one of the important things, as you referenced, we’ve actually been taking the losses of this business through our P&L. And so for the Group earnings, we’ve recognized already the challenges and expenses related to building a business like this. So the overall, on what was U.S. GAAP, what’s now IFRS, the impact will be contained. Again, it’s very important that we maintain our confidence in being able to achieve the $3.6 billion of earnings for 2024. So I think that’s a good summary of where we are here, and we probably need to move on to the next question.
Operator
The next question comes from Thomas (indiscernible) from AWP. Please go ahead.
Unidentified Analyst
Yes, good morning. Thank you. Much have been answered. Maybe can you again say a little bit your expectations on catastrophe, on losses for this year viewing also the renewal seasons? Can you, after a very benign Q1, can you say something?
John Dacey
Sure. There is unambiguously seasonality to the natural catastrophe losses. The expectations that the hurricane season in the U.S., which is typically a Q3 center of activity, is still very much in front of us. So the fact that we’ve had a benign Q1 doesn’t in any way imply that we’ll have a benign year. Having said that, we’ll be happy to take the relatively low level of losses in the first quarter into account.
We overall have an exposure which would have expected losses for a full year given the book we have of approaching $1.9 billion. We think that activity is well priced with those expected losses, and we’ll have to wait quarter-by-quarter to see what actually arrives. But when we put out our targets, both of the earnings, but also of the combined ratios for our P&C business, we assume that we will have a material set of natural catastrophe losses of that sort of magnitude for the full year, and we can absorb those losses because of the premiums that we receive.
Unidentified Analyst
Okay, $1.9 billion you said is the…
John Dacey
Yes, and we have in front of us the June and July renewals, so that number is an estimate that will continue to be dynamic, but we’re approximately there at this point in time.
Unidentified Analyst
Thank you.
Operator
The next question comes from (indiscernible) from Insider Insurance. Please go ahead.
Unidentified Analyst
Hi, good morning. I just sort of was wondering, I know this has been mentioned on the call, but would it be possible to actually provide the specific insurance revenue figures for the prior year quarter just so that we can compare it? Because obviously net earned premium and insurance revenue aren’t a great comparison.
And then also we have sort of seen a slowdown of rates over the last year and P&C reported a 12% rate increase this year and in the prior year quarter it was 19%. So I was just wondered if the rate deceleration is something on your radar and if you are concerned about it.
John Dacey
So on the second question, I don’t think we were surprised, but we were pleased in the April renewals that we were able to achieve a 12% increase in pricing for the risks that we did renew and this led us to an overall increase on that renewed book of about 6%. The reality is we’ve also increased our expected loss cost by, in this case for the April renewal is an identical amount of 12%. But we continue to see a recognition that the lingering inflation and some needs for model adjustments require needs for better pricing and are able to achieve that.
We’ll see what happens in the June and July renewals. There are certain pockets which the market seems to be willing to provide additional prices for, and we will make sure that we get the rate that we think we need along the way. I think what we can say is we expect a continued strong demand for reinsurance. And while there’s adequate supply, there’s not excessive supply. So we don’t expect any breakdown in the discipline that we’ve seen through the January 1 and April renewals, but rather that discipline will continue for us.
I appreciate the comparative challenge that you have. I can give a rough indication that year-on-year we think our book is about 5% larger than it was a year ago under an identical measurement system in IFRS. So that’s the way to be thinking about the growth that we’re able to achieve in reinsurance as we go forward here and half year, we’ll give a fuller disclosure with comparatives which will allow you to do it. But the reality is that the volatility that we see in individual quarters is challenging as we make this transition into IFRS.
Unidentified Analyst
Okay, thank you. And just one other question quickly. It’s a little off piece, but I was just wondering if you could share your outlook on the cat bond and ILF market for 2024?
John Dacey
So what we’ve seen is a continued discipline also in the ILS market. There is capital available, but I call it well informed capital. A number of people had a very good year in 2023. They’re careful not to extrapolate that in those results into future years, including 2024, but rather to recognize that there will be good years and there will be less good years in this space. I think in terms of cat bond issuance, we continue to see large volumes. The relative rates are probably a little less frothy than they might have been a year ago, but this continues to be an important part of the market for named losses. It doesn’t solve necessarily every problem that a primary or even reinsurance company might have in terms of transferring risk, but for specific loss exposures, it can be very efficient.
Unidentified Analyst
Great. Thank you.
Operator
The next question comes from (indiscernible) from Reuters. Please go ahead.
Unidentified Analyst
Good morning. My question goes in the same direction of prices, rival or competitor Munich Re recently indicated that nat cat prices are going — are not longer on the rise, let’s put it that way. You reported a 12% increase in April. What do you think, where are the pricing going? Has a peak reached and are they continuing to rise? And if a peak has reached, are the prices going to stabilize or are they already?
John Dacey
Yes, so Paul, the pricing environment is a little complicated in that a lot depends on which risks and which positions inside of reinsurance tower we’re speaking about. So overall, we think there’s continued room for prices to increase in property broadly nat cat specifically, there are also some sub lines in the specialty book which we expect prices to continue to firm for reinsurance.
I think there are places in the nat cat space which are probably judged by the market to be well priced today. And so additional price increases may not be available for subsectors, certain layers, but overall there remains, I think, the ability to be selective in finding some price increases. Certainly the cover continued inflationary impacts, and in some cases, some model impacts with adjustments.
The other thing I would say is driving the demand for reinsurance is a continued increase in underlying asset values. And so whether it’s coastal properties, residential, but also commercial or any exposure that’s covered by property markets, there is simply more value to be insured. And so the primary companies are finding themselves with larger exposures and as a result, are looking for additional reinsurance to help manage those exposures. And as an ongoing business, our P&C Re team is looking to be able to support those primary companies, but at prices that we judge adequate.
And so right now, as I say, we’re in a market where the pricing is, in some places adequate, in some places we see the need to continue to increase. And I just reach back to the facts of our April renewal, where those prices did go up 12%, it was necessary. Our loss costs also went up 12%, but that included, and you’ll see it in the slide deck, the nat cat space, the property, and specialty space where premiums went up for our book by 12%, 18% and 17%, respectively. So we see opportunities to write this business while still achieving some important price additions.
Unidentified Analyst
Thank you.
Operator
The next question comes from Tom Sims from Reuters. Please go ahead.
Tom Sims
Hi, good morning. You mentioned, this is a follow up question to iptiQ. You mentioned possible restructuring charges over the coming quarters, and I wondered if you had an estimate on what those charges could amount to in dollar terms, what the maximum might be?
John Dacey
So Tom, a lot depends on how this plays out. I mentioned that we have seen and might see some outsider interest in some of the businesses that we have built up here. It’s very difficult to put a number out there. Again, in the scenarios that we have, we don’t see anything that would bring us off of our full year target of $3.6 billion for net-net earnings for the year. But, will there’ll be something coming through, I would expect so as we go forward, but we’ll be transparent with this as we see the need to put something up. Obviously, this is a decision that was taken here in the second quarter. So there’s nothing reflected whatsoever in the first quarter other than the normal operating expenses of iptiQ in that quarter.
Tom Sims
Okay, thanks.
Operator
The next question comes from (indiscernible). Please go ahead.
Unidentified Analyst
Yes, good morning. How have you get the investment return of 4%? Could you explain how you got this investment return? Did you focus more on stocks? Did you focus more on private markets? What was the reason? And if I got you right, you are not, you disagree with the Munich Re CEO who predicted that the increase of prices in the reinsurance market will be finished.
John Dacey
So on the second part, I can’t comment on where Munich Re’s overall view is whether it’s the CEO or the market. What I can say is our experience coming through in the two major renewals that we had in January 1 and April was that we have been able to achieve price increases on a net basis. Those increases have largely been used up in what we think is a higher loss cost. And so it may be the case that his reference was whether there’s a net increase and there the reality that we show is that, yes we’re not getting a price increase above what we think is required.
But again, I’d say that those estimates for loss costs are our estimates, and I believe in nature they are prudential in both the estimates of future inflationary impacts and some of the modeling changes that we’ve done. So that would be the position there.
With respect to the investment return, this is largely driven by the fixed income portfolio that we have performing very well in our ability to reinvest new money. Our asset base is largely dollar focused and the recurring income yield for full year 2023 was 3.6%. In Q1 it was up to 3.9%. Our ability to invest new money in the first quarter has yields of 5%. And this is not at all risky portfolio in the fixed income.
This is focused on largely government bonds and some investment grade credit. But we’re not reaching out into any risky assets to achieve this 4%. But again, it’s helpful to be in the dollar environment where those rates have gone up materially and are staying higher. We are headquartered in Switzerland, but our business has a very, very strong U.S. dollar component in terms of our liabilities and therefore the assets that we hold against those liabilities.
Unidentified Analyst
And one additional question, the loss of $100 million of the Baltimore Bridge, is it integrated in the quarter, in the first quarter results?
John Dacey
Yes. That’s entirely part of Q1. We’ve made this full reservation for what we think will be ultimate cost. We’ll have to continue to evaluate if there’s new information that comes out. But in the scenario that we used, that’s a loss that we’re booking.
Operator
The next question comes from J. Singh from Insurance Insider. Please go ahead.
Operator
Good morning. It’s just not sure if this question is directed in the correct place, but is there any kind of commentary or figures for the kind of income fees of third-party capital for the capital partners business?
John Dacey
We don’t release those on a quarterly basis. We can probably at mid-year give a stronger indication that that business continues to perform well for us, both in terms of the activities in structuring and placing catastrophe bonds for our clients, but also some of the other activities that they’re involved with.
Unidentified Analyst
Thank you.
Operator
(Operator Instructions) The next question comes from Guido (indiscernible). Please go ahead.
Unidentified Analyst
Good morning. Could you say, what is the overall loss you booked at iptiQ over the years?
John Dacey
I don’t think we’ve had that figure. I mean, the business has been going for about nine years in a material way. I think the last two years, the losses because of the expansion into additional geographies, those were the two largest loss years and we talked about last year at approximately $250 million. So again, this was an option that we built some real capabilities in terms of delivering both Life & Health, but also retail Property & Casualty policies to clients in this B2B2C model and over time, that bill has cost us real money.
But our decision again is to withdraw from these activities in a way that maximizes the residual value of what we have and treats the various stakeholders fairly along the way. Be sure that we do have important partnerships and clients that will continue to service as we’ve committed to. So I think it’s not been trivial, but it’s also something that we’ve managed and as I say, expensed each year, every year and so we don’t expect any dramatic one-off charges. There will be some charges as we do this restructuring.
Unidentified Analyst
Okay, thank you. And could you say how big is the total workforce at iptiQ?
John Dacey
So I don’t believe we’ve actually provided that information, but it is spread across, as I say, multiple geographies and continents. And again, some of these businesses, our business will continue to operate and manage, others are probably less not going to be part of the future in terms of the nature of the current activities.
Unidentified Analyst
I read the number of 800, is that correct?
John Dacey
I don’t believe so, but I don’t believe we’ve provided a number.
Unidentified Analyst
Okay. Thank you.
Operator
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Elena Logutenkova for any closing remarks.
Elena Logutenkova
Thank you. And thank you everyone for participating in today’s call. Just a quick reminder that there will be also a session for analysts and investors later today at 02:00 p.m. Zurich time, and journalists can follow that in listen-only only mode. If you have any further questions, please reach out to media relations. Thank you everyone. Bye-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.
