Swiss Re Conference Call Notes – Yield Environment, Interest Rates, Fixed Income Portfolio, Florida Primary and Retail Insurers, Weather Losses, Catastrophe Budget, Redundancies in Property and Accident&Health

The call with Christian Mumenthaler (Group CEO), John Dacey (Group CFO), Thierry Léger (Group CUO) focused exclusively on Q&A.

First questions from Autonomous:

First of all, you use the term protecting the yield of the fixed income portfolio. Hence there was much lower fixed income realized gains. Over the last five years, 70% of Swiss Re’s realized gains have come from fixed income, so I’m not quite sure how to take that guidance. I suppose you’re expecting non fixed income returns, I guess returns on alternatives in particular to make up for the loss of fixed income, realized gains. Or maybe you could just guide as to where we should think the running yield on your new definition should go to. I noticed the underlying fixed income, recurring income has dropped quite materially, very materially year on year. I’m just trying to interpret what you’re saying about this protecting yield. It seems like it’s a new element.

CFO: You're right. I was quoted “protecting the yield”. I think in the first half of the year, we just wanted to point out that the relatively solid investment results, 3.2% got delivered without having to move on the fixed income portfolios at a point where the outlook on future interest rates is unclear. And so I think we're comfortable at the moment or were comfortable during the first half of the year that one the continued caution around credit. We've managed to avoid any impairments whatsoever on the credit side and the positive marks we got on the private equity portfolio in particular, were more than sufficient for us to go through the quarter. I don't think you should interpret this as us giving up intelligent moves in the fixed income portfolio when we see opportunities, to realize a reasonable level of gains. But we're not going to squeeze the portfolio down to nothing when reinvestment rates are where they are. As you said, the recurring investment yield is down to 2.3% from 2.5% a year ago. That's not surprising given where interest rates are, the 10 year, was climbing back up at 1.7%, but when last checked this morning, I think we're back at 1 25%. So we're just going to have to manage through this. The most important thing is that we're pricing our business to reflect the current yield environment and not some hopeful reversion scenario, and that's what's going on. So I think we're fine. I don't think you should interpret this as any material change in strategy. Just a recognition that during the first half of the year, we were able to move forward and achieve this without any significant realization of gains out of credit and or other fixing instruments.

You say that insurers need to be “more realistic on weather losses”. Who are you referring to? The your your students, people buying reinsurance or the industry in general? And I guess in that context, does that signal that you need to think again about where you’re positioning in terms of nat cat versus frequency or who are you aiming that comment at?

CFO: On the Bloomberg quote. To the degree that I was aiming at anyone, I think it is both the primary industry and frankly, people that buy retail insurance. The reality is, what we've priced into our rates for secondary perils is, what we think needs to flow down into homeowners in Florida or in California, commercial enterprises around the world to be able to deal with the losses that we see from more extreme weather events. It doesn't mean that we need to do another round of improvements in our models. Our models [...] are already reflecting the current reality. But not everyone agrees with us on where some of these prices have been. [...] The classic example was in the state of Florida, where we've continued to be underweight because we think the prices that start at the very beginning of this chain are not reflecting the risks that are there. And so over time, we hope to be able to demonstrate that our picks, which seem to be relatively high, are the right picks for people to go with. And if that cascades down into underlying Policies, that's the right answer. A great example of where that did happen for us was frankly in Japan property after the typhoons of 2018 and 2019, where the primary companies fundamentally change their rates as a result of the pressure that we put on them in our reinsurance side. 

UBS analyst asked about cat budget being robust

Are you confident that your catastrophe budget is struck sufficiently robust robustly or it could just be something that Swiss Re looks at as well.

CFO: Our belief is that we've got, and we frankly look at every year and during the course of the year, the expected losses we've got on nat cats, we allocate that during the course of the year with a overweight in Q3. So we've got a larger expected budget on Q3 than any other quarter. It served us well and frankly, with the exception of 2017 and the Hin losses, I don't know that we've been particularly far off and over any longer period of time. We've actually been very very close to budget on average. Any particular year is going to be up or down given the good or bad luck. So I think um you should expect that we do review this constantly and we're comfortable where we've got the pics for this year. And that has on, you know, not kind alone probably 700 million expected losses between Reinsurance and Corso for the third quarter. And that doesn't include the large man made events.

It’s nice to see that the adverse development on casualty lines has come down a long way. Is it possible to break this out perhaps in quantity between the adverse developments in North America liability and cyber versus that favorable workers compensation development and what drove it? The adverse, is it just specific cases? Or or are there any assumption changes within the

CFO: in any one quarter we evaluate different lines of business and if there are places where we think it would be prudent to reinforce certain reserves will do that. But, you know, on a net basis the reality for P&C RE has been very clear it's been positive for the year to date. We don't believe we've got any holes in the reserving positions. We'll continue to evaluate if we've got new information or new events that make us think that we should do that well reinforce where we need to. But the good news is we found redundancies in many other parts of the book, whether it's in the property side, some of the accident and health businesses other places. And we've been able to fully cover the funding of some minor adjustments during, actually for the last 4 quarters now.

The audio below is the first of 4 blocks of the conf call Q&A from 30.07.2021

Using Python to transcribe Conf Calls, Webcasts

The above audio was uploaded to an S3 Amazon Bucket, then was fed via a Python script to Amazon Transcribe service which resulted in a raw transcript. That raw transcript was then used for the quotes above. By default Amazon Transcribe does not seperate speakers, has difficulty with abbreviations or names like “Nat Cat”, for natural catastrophes, which will be transcribed incorrectly.

For more on transcription see this article: Link

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