Swiss Re has reported net income of $3.50bn for 2014, down from $4.44bn in 2013, on premiums earned and fee income of $31.26bn, up form $28.82bn the previous year. Earnings per share (EPS) declined to $10.23, from $12.97. The return on equity (RoE) fell to 10.5%, from 13.7% in 2013.
The decline in net income reflected restructuring costs at "the problematic pre-2004 US life business". The Life and Health Reinsurance division's results were also impacted by the unwinding of an asset-funding structure supporting a longevity transaction.
In property & casualty reinsurance, earned premiums rose to $15.6bn, from $14.5bn the previous year. Net income rose to $3.56bn, from $3.23bn. The combined ratio improved a fraction to 83.7%, from 83.8%. Returns on investment rose to 3.7% from 2.8%, which boosted the RoE to 26.7%, from 26.0%.
Swiss Re said that the improved result was due to a strong underwriting result, helped by benign natural catastrophe experience and prior-year net reserve releases. The combined ratio was flat at 94.1%.
Claims development on prior years was favourable in all lines of P&C business. Releases on recent years more than offset increases for the New Zealand earthquakes, giving a net property release of $277m (2013, $441m). In casualty, favourable experience in all regions more than offset increases for asbestos, environmental losses, and other increases within the portfolio. There was unfavourable loss development in motor in France and the UK, but this was offset by positive development elsewhere. The net release for 2014 was $62m (2013, $455m). Favourable development in engineering helped the releases to $499m, up from $475m in 2013. Overall, reserve releases declined to $838m in 2014, down from $1.37bn in 2013.
In life & health reinsurance, premiums earned rose to $11.26bn, from $10.0bn, but net income sank to a loss of $462m, from a gain of $420m in 2013. The return on investment also declined, to 3.2%, from 4.1%. The pushed the return on equity down to minus 7.9%, from plus 6.4% the previous year. The loss was the result of a pre-tax charge of $623m on the pre-2004 life business in the US. The unwinding of an asset-funding structure hit the bottom line, but was counterbalanced by an equivalent reduction in Swiss Re's debt. Swiss Re said that the interest it was paying on the debt was higher than the earnings from the asset funding structure, so unwinding it would benefit future earnings.
Swiss Re's asbestos and environmental claims exposure in the US is significant enough to warrant a few paragraphs of explanation. By end-2014 Swiss Re carried net reserves for US asbestos and environmental liabilities equal to $2.06bn. During 2014 the company incurred net losses of $291m, and paid net against these liabilities the sum of $177m.
The nature of these liabilities is such that Swiss Re believes that liability projections are subject to considerable volatility, far higher than for non-asbestos and non-environmental liability exposures. "Management believes that its reserves for asbestos and environmental claims are appropriately established based upon known facts and the current state of the law".
Swiss Re is maintaining "an active commutation strategy to reduce exposure".
In the two smaller divisions, corporate solutions and Admin Re, premiums earned were $3.44bn and $955m respectively, with the former up from $2.92bn, while the latter declined from $1.33bn. Net income at corporate solutions rose to $319m, from $279m, while at Admin Re it declined to $34m, from $423m.
Swiss Re said that natural catastrophe loss was lower than normal in corporate solutions, but that this had been offset by a larger number of man-made losses. Corporate Solutions is looking to expand more into Primary Lead, and moving more significantly into selected high-growth markets. An acquisition in China is expected to close in Q1 2015, given regulatory approval.
The weakness at AdminRe was attributed to a net loss of $203m on the sale of US subsidiary Aurora National Life. If that is excluded, net income was $237m, still significantly down on the previous year.
The 2014 regular dividend was raised to CHF4.25 a share, from CHF3.85 in 2013, but the special dividend was cut to CHF3.00 a share, from CHF4.15.
Swiss Re noted that payments would be made in the form of Swiss withholding tax-exempt distributions out of legal reserves from capital contributions. This would exhaust these tax-privileged reserves. As a result, Swiss Re expects future excess capital management measures to take the form of a share buy-back. With this in mind, Swiss Re is proposing a share buy-back programme of up to CHF1.0bn, exercisable until the 2016 annual general meeting.
Swiss Re chairman Walter Kielholz sad that "we have seen for some time a trend of economic value significantly exceeding the market value. It makes therefore a lot of sense for the company to invest in its own shares and benefit from the discount".
Swiss Re group chief executive Michel Liès said that Swiss Re "generated strong earnings despite the challenging industry environment". He said that Swiss Re remained confident that it would reach its 2011-2015 financial targets.
Antonello Aquino, Associate Managing Director, Moody's Investors Service, said:
“Swiss Re’s results have been supported by very strong results in P&C reinsurance, benefitting significantly from below-average natural catastrophe losses during the year, leading to a reported P&C reinsurance combined ratio of 83.7%.”
“The favourable P&C loss experience has been tempered, in our view, by the weaker than expected result in the life & health operations, as a result of the pre-tax loss of USD344m related to the unwinding of an asset structure related to a longevity transaction, and the loss on disposal of Admin Re’s US life subsidiary (Aurora).”
“Looking to the future, we note that Swiss Re reported a decrease in its risk-adjusted price adequacy ratio by 3 percentage points for the January 2015 renewals, albeit still above 100% at 105%, reflecting continued pressure on reinsurance rates. The company is also expecting an increase by 200bps of their combined ratio to 97% in 2015, driven partly by the softer rate environment. Whilst nobody is immune from the current price pressures, we consider Swiss Re to be comparatively better positioned than most reinsurers to navigate the hurdles ahead.”