Swiss Re Execs Sleeping Well After $2.4 Billion Q3 Reserve Boost

While a $2.4 billion boost in loss reserves for the third-quarter will help Swiss Re’s executives sleep better on a bigger cushion, across the industry, worsening trends in U.S. liability loss costs aren’t letting up, they said yesterday.

In fact, Swiss Re put up higher reserves for recent prior underwriting years of 2020-2022, Group Chief Financial Officer John Dacey told investment analysts yesterday. In 2023, Swiss Re and other insurers and reinsurers focused on the 2014-2019 years in shoring up their prior-year loss reserves.

Dacey summed up Swiss Re’s pessimistic view of the current and future state of industrywide U.S. liability loss developments after Group Chief Executive Officer Andreas Berger provided an initial discussion of the overall reserve charge, which the reinsurer preannounced last week.

Related article: Swiss Re Cuts 2024 Profit Target After Raising US Reserves

Berger noted that the third-quarter reserve action brings total prior-year U.S. liability reserve additions for the year to date up to $3.1 billion, and that the action “addresses the outcome of a comprehensive review which considered the latest industry data and legal trends.”

“The significant amounts we have added reflect the incorporation of an adverse future scenario into our reserving assumptions,” he said. “Looking forward we expect now to sleep well, particularly well when it comes to this part of our business,” Berger said, adding, however, that Swiss Re “will remain vigilant and proactive wherever required, in particular when it comes to writing new business.”

Like Dacey, Berger said that loss development in U.S. liability “remains an overall industry issue,” highlighting the reinsurer’s caution on new U.S. liability business and the fact that it pruned its U.S. liability book by 21% during this year’s renewals. “We’ll continue to apply [an] uncertainty load on new business while focusing on our clients, rigorous portfolio steering, disciplined underwriting and setting prudent initial loss assumptions,” he said.

As for the prior-year reserve position, Berger said the added reserves put Swiss Re’s overall P/C reserves at the higher end of range of reserve estimates, specifically at the 90th percentile, of the best estimate range. “From here on out, we do not expect negative net reserving impacts to drag down our results,” the CEO said.

In fact, in spite of significant natural catastrophe events and the reserve charge, strong underlying underwriting and investment results across all of Swiss Re’s business units fueled an overall profit—albeit a small one—of $102 million for the quarter. Through nine months, Swiss Re recorded net income of $2.2 billion, or a return-on-equity of 13.4%.

Assuming “normal natural catastrophe experience” for the rest of the year, Berger said Swiss Re expects group net income to come in at $3 billion for the full year.

But that’s roughly $600 million less than Swiss Re was previously targeting for the full year, which prompted one analyst to question what level of adverse reserves might have been contemplated when the $3.6 billion outlook had been set.

“We came into the year not necessarily expecting anywhere near the kind of reserving that we’ve done,” Dacey said. “We expected to achieve this target and frankly, I think could have achieved the target had we chosen to,” he said, referring to the $3.6 billion. “It was a choice to go ahead and put this behind us—and it was not taken lightly….It’s never comfortable missing an external target, but [I am] absolutely convinced a CFO that this was the right positioning for the group going forward.”

From a CEO’s perspective, Berger offered a “psychological” benefit for the underwriting company he sees taking hold as a result of putting such a big reserve boost in place—in spite of the missed target.

“We did the exercise, the review,…and we looked at all options. We saw the quality of the underlying book also. And it is really demotivating to have this drag, this cloud hanging over you all the time—also for our underwriting psychology. So we decided then to take the opportunity of the very good underlying results to demonstrate that we can afford really this significant one-off effort.

“It puts us into a new position,” he said, referring to both internal and external messaging of “a change in situation for the company.”

“That’s something that we get as a feedback from internal but also external stakeholders,” he said, prompting an analyst to ask specifically about external responses from brokers and clients.

“It’s a very psychological reaction because this was the topic of almost all discussions, general discussions….It has also an impact on our people when you go out into the market and promote the Swiss Re brand and everybody’s talking about the casualty issues. In that respect it was very positive,” he reiterated.

The overall market, including “reinsurance peers have also acknowledged that this is a topic. We are not seen as the negative outlier,” he said.

Addressing more technical questions about the reserve addition, Dacey said the vast majority is “IBNR that shows up on top of reserves which were otherwise you know adequate as of midyear.”

“We continued to do real analysis during the course of the third quarter…. That provided some insights [that] we were in the range, he said. “What we’re we’ve changed is getting to a much more prudent position in that range.”

He continued: “We’re modeling continued deterioration of U.S. liability cost year-on-year. That deterioration we expect not to be slowed down by any legislative activities in the U.S. over the next four or five years. We’re just extending out a pessimistic view of the world that unfortunately cost the industry broadly, [and] Swiss Re specifically, considerable amounts of money.”

Dacey then referenced the fact that “a lot of the money went into fairly recent [prior underwriting] years”—2020, 2021 and 2022. A slide presentation revealed that Swiss Re has taken the ultimate loss ratios for these underwriting years from around 70 up to around 90, while ultimate loss ratios for some prior years strengthened last year, 2016-2019, sit up above 100, requiring minimal take up this time around.

To go from the midpoint of the reserve range to the 90th percentile, he said, “was substantial in terms of the extra amount that we put in. But we did this precisely because we don’t want to have to come back to the topic at any time for these years.”

This article was first published in Insurance Journal’s sister publication, Carrier Management.