Good morning or good afternoon. Welcome to the Swiss Re 9-month 2021 key financial data conference call. Please note today's conference call is being recorded. At this time, it's my pleasure to hand over to John Dacey, Group CFO. Please go ahead, sir.
Thank you very much, and good morning or good afternoon also from me to everyone. I'm here with Thierry Léger, the chief Group Chief Underwriting Officer, and Thomas Bohun, our Head of Investor Relations. As usual, I'll start with a brief overview of the key figures for the first nine months that we published this morning. We're pleased to report a profit of $1.3 billion for the first nine months of 2021, despite the significant large loss events and the ongoing burden from COVID-19. Driven by our focus on portfolio quality and the disciplined underwriting, P&C Re and Corporate Solutions produced excellent results with a combined profit of $1.9 billion and reported combined ratios of 97.5% and 91.1% respectively.
P&C Re and Corporate Solutions delivered normalized combined ratios of 94% and 95.7% respectively, and are both well on track to deliver on their ambitious combined ratio targets for 2021. Supported by strong underlying margins, Life & Health Reinsurance achieved a profit for the second quarter in a row in spite of a heavy burden of COVID-19 claims. The group's strong return on investment of 3% was driven largely by recurring income as well as equity valuation gains, with no credit impairments for the entire year to date. Swiss Re maintains a very strong capital position with group SST ratio of 234% as of the first of July. The 19 percentage point increase compared to the 2021 starting position of 215 was supported by first half of economic earnings of more than $3 billion.
As we move towards the end of a busy year and into 2022, we're confident that our businesses can continue their strong performance, and we see opportunities to deploy capital at attractive returns across the group. With that, I'll hand it back over to Thomas to introduce the Q&A session.
Thank you, John, and hello to all of you from my side as well. As usual, if you could restrict yourselves to two questions, and then if you have another question, please, rejoin the queue. Operator, if we could, start with the first question, please.
The first question comes from Andrew Ritchie from Autonomous. Please go ahead.
Oh, hi there. There's quite a lot of debate around the viability of property cat business right now. I was interested in the comments you made, I think it was John, in the media conference this morning, where you were suggesting your property cat business is still running at less than 90 combined ratio year to date. I wasn't sure if you're trying to suggest it's now adequately priced and you're happy with that, 'cause obviously I think we'd expect it to run lower than that on a normal, more normal year. What were you trying to tell us?
Were you trying to say that this is viable business, it's adequately priced, we don't need to do a lot more work or what's your kind of thinking in terms of what additional rate or restructuring might be needed across property cat business at an industry level? Second question. Corso growth rate was quite a lot higher in Q3 than the first half. Is this are we sort of back in growth mode now? Should we assume that Corso is now growing kind of in line with renewal rate, at least from this point? Thanks.
Hi, Andrew. This is Thierry. I will take your first question on property cats and John's reference that we are below, despite all the losses, still below 90% combined. I think that what we wanted to say with this is, despite these very, very large losses and also being above our budget, that still doesn't mean that this business is, at this point in time, loss-making. By making reference to below 90, we simply said that the premium is still covering the losses. Regarding the underlying question on price adequacy of this business, we can all see the dynamics that are around in the market. We have seen the strong growth in secondary perils.
It is very clear that some of the businesses, some of the layers, more in the frequency part, there has been a lot of pressure lately. Capacity is pulling back, and we are very clear since our investor day in November last year that we see particularly that space as not attractive on the price, not well structured and still desiring price increases. We have a bit of a more differentiated approach, I guess.
Andrew, I might add on that piece that. You know, if we're taking on the tail risk of the industry, we expect to be compensated for it. The fact that we're still profitable with a combined ratio lower than 90% in what is a heavy but not extraordinary year, I think shouldn't be a surprise to people. We understand the risk that we're bringing onto our book. As Thierry said, there's still important segments of this space which do need further price increases. We've been surprised. As an industry, frankly, in a couple of places again this year, between the Texas storms in the winter and much closer to home here, the floods in July in Northern Europe. I think we would expect prices to continue to adapt appropriately.
When I say adapt, I can't think of a place where that would mean going down. We also think that Swiss Re, at least, has got the modeling capability and the expertise to be able to make money in this business even when there's a heavy cat load. That's the first question. Your second on Corso growth. It's a pretty straightforward answer, actually. We did this massive restructuring of the portfolio, getting rid of a third of the risks in 2019. That's continued on and finally has sort of expired as a drag on growth for Corso here in the second half of 2021. As we go forward, the strong increase in written premiums will earn through.
I think not only should you see us grow with the price increases, which year to date have been 12%, but probably even beyond that, as we see some interesting opportunities for growing parts of the business, as we go forward. I'm not making specific predictions, but it shouldn't surprise people for us to be on course in a double-digit growth mode, in sort of the near quarters.
Thank you, Andrew. Could we have the next question, please?
The next question comes from Vinit Malhotra from Mediobanca. Please go ahead.
Yes, good afternoon. Thank you very much, and congrats on the great results. I just had one question on the cash flow situation at the holding. If you could just provide an update which, as you did in the last year, the year-end of $4.2 billion, and if you could provide something similar to that effect or some number there, and also in the context of these 3Q cat losses, and how would that affect the cash position at holding? That's the first question. Second thing is that, also notable for us is the normalized combined ratio of P&C Re, which is 94% at nine months stage. Could you comment a bit about, was there any COVID frequency benefits here, you think?
In other words, if you have to think for next year, more pricing is being earned through, but also economic recovery, and how should we think about these two forces on this 94.0%? Thank you.
Vinit, I'll address the first question and Thierry Léger will actually answer the second one. On the first question, we've not disclosed the Swiss Re holding company cash. What I can say is the liquidity of the firm is robust up and down the legal entities that are relevant. We are very comfortable with our cash position at the group level as well as subsidiary level. There's nothing to be concerned about there in spite of the losses that we are reserving or paying out here. With respect to the P&C Re normalized combined ratio, Thierry Léger, you want to take that?
You are making reference to frequency benefits that we might, once we normalize, actually have profited from unusual reduction in attritional frequency losses, which is not the case. We also generally on the man-made losses, this was not an easy year to the country. There were substantial losses actually going on in the industry. You know that after COVID, the reopening of the industry happened. Lots of industries are running at the limits, which is very typical for property. In those cases, you do find losses. There was no such benefits that we could see.
Clearly true in 2021. The only thing I would say is some of the property losses 2020 for Corso were probably a little below, and that's allowed us to make some adjustments to the reserve positions there. On the P&C Re book, we don't think that there's any real benefit that's going to be ephemeral coming through in what we're reporting as a normalized for 2021.
Thank you, Vinit. Could we have the next question, please?
The next question comes from Will Hardcastle from UBS. Please go ahead.
Good afternoon, everyone. Thanks for taking the questions. Two here, just first one on catastrophe, second one on solvency. I guess Ida and European floods, the losses have come in, you know, significantly lower than initial market expectations. Any color here would be helpful. I guess, do you think it was due to a change in gross underwriting or a change in retro protection? Anything here that we should think about the sustainable benefits that will help the book going forward as well? Secondly, on solvency, also a positive print. I guess, can you refresh how you view, let's say, a 230% type SST level in terms of ability to support growth, but beyond that in terms of the distributions? And what's the order of preference? Obviously, you've highlighted growth deployment.
Between excess shareholder returns and debt reduction beyond that. Thank you.
Will, I will take your first question. John will take the second. On our improved underwriting results, I think also here we can go back to the investor day in November 2020, where we said what we would do. We, at the time, were looking ahead thinking that secondary perils, particularly those induced by climate change, would continue to behave very irrationally. Therefore, we said we would reduce our exposure to those levels. We also at the time, you remember, we also said we see social inflation as a big threat, and therefore reduced our exposure to large corporate risks in the US. We did both of that. That actually led to a different mix.
I would refer to the changes we did much more on the structural side. While we always do improve our retro program, those changes to the retro certainly don't explain this improved performance.
On the second question, Will, with respect to the solvency, you know, the 234% is a very solid number and obviously puts us in a much more comfortable position than the 215% when we started the year. We've, you know, been very explicit, I think, in our priorities for the capitalization of the group. The first and foremost is to remain one of the best capitalized reinsurers in the world. I think we tick that box. Second is to be sure that we're maintaining and in some cases be prepared to increase the dividends.
We've been telling you for all year long that dividend we believe is secure, and the economic earnings that you've seen in the first half of the year should reinforce that. The third is to deploy our capital for new growth opportunities, and frankly, in all of our businesses, we see this opportunity in front of us here, in the coming quarters. I, with the that Corso is achieving, with the demand that our Life & Health Re business has, both for support of product launches in the primary market, but also some structured transactions which are being discussed, we think our Life & Health Re franchise can continue to grow.
The P&C market, which Thierry Léger just alluded to, we expect some real price changes as a result of the losses that have been incurred here in 2021. In particular, what we thought was underpriced, segments on higher frequency events on the aggregate covers on sort of poorly modeled perils should see better pricing. Then in those better pricings, we'll evaluate whether we're prepared to expand into some of these places where in 2020 and 2021 earlier, we didn't think we were adequately priced. Those are the first three legs. The fourth leg is if after reviewing the ability to deploy, we really find ourselves with excess capital, then yes, we'll we don't need to sit on it.
We're prepared to return it to shareholders. We've done that in the past, and we'll do that in the future if that's the right answer.
Thank you, Will. Could we have the next question, please?
This question comes from Iain Pearce from Credit Suisse, please. Go ahead.
Hi. Afternoon, everyone. Thanks for taking my questions. The first one was just on the profitability of the cat book. Obviously, the profitability for your book sounds very good, but I'm assuming the profitability for the industry won't be at that sort of level. Just hoping you could sort of expand on the differences in Swiss Re's cat book relative to the group. Is there anything in your exposures that's leading to you having a much more profitable book this year? The second question is just on Ida and the proportional loss share. Is this sort of loss share now what we should be assuming for a North Atlantic hurricane for Swiss Re?
It's just the size of the move in loss share is a bit more than what would be implied by the movement in the PMLs that we've seen this year. I was wondering if you could touch on whether you think this is a more normal level now.
Iain, I'll start, and John will add to it. On the profitability of the cat book, indeed, we think that thanks to the changes we made to our cat book early in the year, we have actually been able to avoid losses. We have also said that we have avoided large losses. That's the degree, but it's an estimation because it's difficult to estimate losses to aggregates, of course. But that's what we think we have avoided. We think we are in a very strong position. John alluded to it. We're also from a capital position in a comfortable position. We think, well, very well distributed book of business in cat for next year to actually grow our capital allocation to that business if the opportunities come our way.
We are optimistic given current market dislocation in certain spaces that we watch very closely that this will be possible. We enter 2022, I think, on the back of a very strong liability book in general and are very confident therefore to be able to profit from the opportunities that will present themselves next year, by the way, across all our businesses. John, if you wanna add something to this one.
Yeah, maybe just the specific questions around Ida. Ida was a bit of an odd storm. It ran up, obviously did a lot of damage near the coast of Louisiana, but managed to miss the major metropolitan areas. The damage both to New Orleans and Baton Rouge was surprisingly light. Then it had this tail in the Northeast. You won't be surprised to know that not only do we model hurricanes, but we actually model subsequent rain, hurricane-induced rainfall, that matters especially in Japan with the typhoons, but it turns out that it matters in North America as well.
It wasn't surprising to our teams that you saw this kind of flooding that hit mostly personal lines and actually a surprising amount of motor damage, as the flooding was not necessarily coastal, but rather in areas where homeowners or commercial lines flooding would not necessarily be in force. These losses typically are not reinsured. But if they are reinsured, we've, I think, prepared ourselves to be sure that we're at a higher attachment point where they didn't necessarily kick in in any material way. To your specific question, is this the rule of thumb for future North American windstorms? It's a little complicated. I'd say on this one, in particular, the nature of the losses managed very well within our book.
We had actually de minimis exposure to Louisiana specialists, which also had us avoid some of the damage that was done by wind in the state. As we go forward, you know, we're in a range, this was towards the lower end of the range that historically has been there. At least with the current underwritings we have, I'd say, you should expect that we're a little better protected against some of these extra losses or add-ons than people might assume.
Thank you. Iain, could we have the next question, please?
The next question comes from Thomas Fossard from HSBC. Please go ahead.
Yes, good afternoon. One question regarding the 2022 outlook. Some companies have already laid out well into the mid-teens top line growth expectations on the P&C Re side. I mean, it seems that you're pretty optimistic reading your press release and hearing or listening to your comments for next year. It would be interesting to better understand what kind of growth rates both in P&C Re and Life Re you're shooting for next year if current market conditions were to prevail. The second question would be related to the Life & Health reinsurance results. Actually very strong print in Q3, partly supported by inforce transaction.
It seems to be that since Q1, actually the experience and the underlying profitability of the book has been running probably better than you were expecting. I was wondering if you could update us on the famous 10%-12% Return on Equity based on the $8 billion share of equity. I mean, it seems to be that we are starting to hedge slightly higher now. Any update on that would be interesting. Thank you.
Thanks, Thomas. I'll see what I can do here. With respect to the growth of P&C Re in 2022, I don't think we've got a prediction. We would expect for pricing to be rational. If pricing is rational, we'll see opportunities to write a bigger book of business and look forward to that opportunity. We don't exclude the possibility that somehow it goes otherwise. What we will say is there seems to be some pressure in the retro market, which I guess may constrain some of the people that rely on their balance sheet less than we do to be able to grow new business. I think we'll see what that dynamic is.
We are, you know, committed to be important and reliable partners to our primary insurance clients over not just years but decades. We'll continue at rational pricing to deliver the covers that they're looking for. We'll work with them for structures that work for both of us. If that provides the opportunity for a strong growth, we'll take it. We'll just have to see where January 1 and subsequent renewals actually land us. On Life and L&H, I'm probably a little more optimistic. I think, you know, we've been able to grow again 10% year to date that book of business. Some of that's been flattered, I guess, by foreign exchange.
What we see there is a continued demand as a number of European and US companies continue to restructure or adapt their own business models for us to be able to help them do that, as well as a real demand for protection products, which is our bread and butter around the world, emerging markets in particular. The skill set that we have, the expertise we have, is being called upon by primary companies to help them develop a broader suite of products which address mortality morbidity. I'm probably a little firmer in the expectation of continued growth there.
You mentioned life and health profitability, and we acknowledge that the $899 in nine months is a higher earnings and a higher return on equity than we've guided the market to. Two observations. The first, which is reiteration of what we were talking about at the mid-year, that the allocation of mortality losses between COVID and the underlying business remains a bit of an art compared to a science. We've reflected largely what our primary companies have allocated the losses to with respect to COVID. But that might be understating some of the mortality experience of the broader portfolio.
I think the precision there of what's COVID and what's not COVID, at least on the margin, is an area which may result in a flattering of the non-COVID performance. The second thing in the third quarter, there really were a series of one-offs which helped the quarter but probably are not likely to repeat, at least not in a predictable manner, from management action. Some of them have been quarters in the making. Some of them came up during the course of the third quarter. I think the guidance we've had, unfortunately for you of 10%-12% remains in force for 2022.
We do have some challenges in the United States with a cohort of life policies with a potential crossover, which should be seeing their last year of economic challenges for the industry in 2022. The other way to think about this is, you know, we would target an income that's probably closer to $800 million for a year related to a 10%-12% return on equity, is a reasonable approximation for the coming year.
Thank you, Thomas. Could we have the next question, please?
We have a follow-up question from Will Hardcastle from UBS, please go ahead.
Oh, well, thanks. You made the comment that secondary perils are underpriced. You've clearly taken a lot of action here, and you continue to see capacity pulling back. I guess this is a bit hypothetical, but in a world where perhaps everything has a price, can you give us any sort of crude estimate of just how much this is underpriced? I mean, are we thinking it's 10%, 20% or 50%? I know it's different by line of business, but just at what level we should consider Swiss Re stepping back in to take advantage of a potential opportunity. The second one is the inflation debate, which is heightened in recent months.
While a large part of this is, you know, it's forward-looking uncertainty along the tail lines, I'd be interested to know if perhaps you've experienced anything already on the current portfolio, whether it be on the shorter tail side or not. Which lines of business we should, you know, think about or where you actually would be looking under closer scrutiny in an inflationary environment. Thanks.
Well, I will take your first one, and John the second. What price is required? One is the required price, and the other one is the price you think you can get in the market. That's hopefully very different. I will answer your question more technically, maybe. I mean, technically, what we said in November last year with regard to secondary perils.
Technically what we said is that there are some structural issues. Some of the covers that we were placed in the market were in a frequency space and exposed in a way to secondary perils that has no price in our view. On those, we will continue to abstain. John referred to being ready to potentially grow into some of the space. That's not the space. What you're talking about are areas where we think there is a price, and the price increases required in those spaces are substantial. They're definitely they can be above 100%, they can be above 50%. They're very, very high to make those insurable. But again, as I said, we also have to work on loss definition clauses.
These are tricky areas. We have to look at where those what type of secondary perils there are. We still believe that certain perils that are particularly exposed to climate change, such as wildfires, hail, certain torrential rainfalls. Those areas or treaties particularly exposed to these independent of where they are in terms of structure will probably remain close to uninsurable still in our view.
Maybe on the inflation side, again, Thierry Léger had some great commentary I think at the Monte Carlo describing the way we think about social inflation and temporary, but not completely so, challenge on the supply chain. You asked, Will, have we seen any of this and have we moved?
Like, where we have moved on the all three is with respect to our costing models and making sure that we're getting adequate prices for a different regime compared to what we saw between 2009 and 2020 for core inflation in most markets, as well as the impact of social inflation, which I argue we made adjustments for in 2018 and 2019, also with some of the reserve changes that you saw we made. The very recent claims experience, what I would say is one of the unpleasant surprises in Ida was with all this motor damage, the actual cost of replacements and potential repairs of cars was higher than people might have expected.
You see this more broadly in the US motor experience. You know, some very good companies are struggling with some loss ratios which are out of line with what you would expect. This is bleeding through into some of the losses on flooding related to the hurricane. I think that's one place we came to an industry loss of between $28 billion and $30 billion, in part because we were expecting this is going to be more expensive to rebuild in some cases, but also to replace damaged automobiles, but also other important damages that the hurricane played.
It's a place where we've adjusted some of our models and we'll undoubtedly continue to evaluate, are we sufficiently putting in place for nat cats the inflation that we should expect in the next 4-6 quarters related to supply chains.
Thank you, Will. Could we have the next question, please?
The next question comes from Iain Pearce from Credit Suisse, please go ahead.
Hi, thanks for taking the follow-ups. The first one was on Corso reserve releases. You mentioned some sort of frequency benefits still earning through potentially related to COVID. How long should we expect this elevated experience to last, or do you think the sort of frequency benefits have now fully been recognized? Then the second one was on the sort of potential to be growing in retro in those higher, more tail risk areas. Is the plan to do that for the benefit of your own book, or is the plan to be seeding that out to Alternative Capital Partners?
I'll try these. on Corso, I think the benefit, the reserve releases has been focused on our property book. We've been more cautious in any releases related to casualty, in part because we think the court systems in the US have been slowed as a result of COVID restrictions in 2020, but also in 2021. We're not been as, I think, decisive in concluding that these losses didn't occur or won't come through. That doesn't mean that I expect big reserve releases to follow, but it does mean that we believe that we are well-positioned to be able to bear real losses that might come through on a delayed basis in the Corso book.
In the meantime, I think, you know, the important messaging there is that the normalized combined ratio that we've provided Corso under 96% is cleared out all that benefit. The core activities of the book it has today is showing this improvement, and we expect that trajectory to continue. Sorry, the second question was growing-
Growing the book and how we would use retro for this. Is it on our behalf or-
I'm sorry. Yeah. We obviously access the retro market in many different ways. The Alternative Capital Partners team, among other things, facilitates the issuance of cat bonds by our clients that wanna go that route. We would expect that activities to continue to be robust as we go into 2022. We have our own sidecar, one of the largest in the industry. You know, frankly, I think they were probably a bit relieved when they saw our loss picks for Ida, in the ad hoc announcements we put out three weeks ago. I think, you know, our investors recognize that we are sharing the economics of the group with them.
We're not putting them at any particular disadvantage vis-à-vis the book that we underwrite. We underwrite our book for profit. We think we should be able to continue to grow our own retro capacity in line with well-priced risks coming in the front door. At the moment, we use this to manage some peak risks, but also just to help with the book. I think we're optimistic over time about being able to grow our gross underwritings, grow the net, but also continue to grow the support by other people interested in sharing the economics with Swiss Re.
Thank you, Iain. Could we have the next question, please?
The next question is a follow-up from Thomas Fossard from HSBC. Please go ahead.
Yeah, thanks for taking the additional questions. The first one would be related to mortality losses. So you had a pretty chunk of mortality in Q3. Some of that is true ups, but just wanted to better understand what is your scenario for Q4 and maybe into 2022, what kind of exposure should we think that you may get, maybe in the first half of 2022. Anything on this would be helpful. The second question would be related to your investment portfolio. Have you made any big changes or significant changes quarter to date. And I'm thinking specifically of the 14% liquid and cash position that you were holding at the end of Q2. Has this changed, or, I mean, yeah, anything you could say about that.
Thank you.
I need to push the button. With respect to the COVID mortality, a couple of thoughts. One is, as you correctly point out, we've continued to pay a series of claims, first and foremost, to the portfolio in the United States, which has been the largest single source of losses for us through the pandemic. In the third quarter, there was also some significant losses coming through on what we believe is largely delayed reporting out of India and mostly delayed out of South Africa, although there probably was some third-quarter losses there as well. On a going-forward basis, which was the point of your question, two things.
One is, as the vaccination rates in the US now have reached about two-thirds, what we are starting to see is the people succumbing to the virus and actually dying as a result of COVID are a slightly different population than what we saw in the past, and in particular seem to be less insured. We've adjusted our guidance where we had said previously that for every 100,000 COVID deaths in the US, we would expect a loss of $200 million. That's come down now to for every 100,000 deaths, a loss of $150 million.
We've actually set a range of 125-175 because it's a little difficult to judge based on the data that we've seen in the last quarter or two quarters, but that seems to be the trend. Fewer insured losses is related to this. The other thing which I'd say is the second peak in the United States, right? The biggest first peak was obviously in Q1, the second peak in Q3, in terms of number of cases, is falling dramatically through to October. The deaths are down from a peak of about 2,000 per day to 1,400 per day, but that's still a lot.
We expect this to continue to be a cost in this fourth quarter for us. The US-related losses in Q3 were $170 million. At least right now with what we see, Q4 would be a smaller number than that. To be seen as the pandemic itself continues. We won't be surprised to see some lingering mortality claims in the first half of 2022, in particular out of the US. We don't foresee other geographies at this point of time presenting material losses to us. We'll have to judge this as the pandemic continues its path. I'm not going to predict what that path might look like.
What we can say is the P&C losses have become very small in the third quarter, about $50 million in P&C Re, an actual positive result of some event cancellation reserves being released in Corso for the quarter. The fourth quarter, we've got no evidence that there's going to be any material charges coming through in P&C Re or in the P&C businesses.
On the investment portfolio and changes.
Investment portfolio. I guess the answer there is we remain a bit cautious. The spreads available on credit remain pretty tight. It's not providing us the incentive to jump in to credit in a big way. We've got a reinvestment yield of 2.2% in the third quarter. I think we're okay not going risk on at this point of time.
Thank you, Thomas. Could we have the next question, please?
The next question is a follow-up from Andrew Ritchie from Autonomous. Please go ahead.
Oh, hi there. It's a very quick one. Am I correct to assume the run rate of losses or from investment in iptiQ hasn't changed? I think it's $200 million per annum. I think the higher loss in group center in Q3 was all down to mark-to-market effects. I just want to clarify there's no additional. I know iptiQ's ramped up in a few new countries, especially China, I think this year. I just wonder if that's meant the run rate of losses has been higher.
No, I can confirm that, you know, 200 or between 200 and 250 for four years, a good guidance and hasn't changed. You're exactly right. It's the mark-to-market on a couple of positions have been the challenge in group items this year. These are positions which in 2020 performed very strongly for us. There's been some retrenchment, but you know, over time we've been very comfortable with these positions.
Thank you, Andrew. Are there any more questions?
Gentlemen, so far there are no more questions.
Thank you all for all the questions. If you have any further questions, please do follow up with the Investor Relations team. Thank you again, and we wish you all a very nice weekend. Thank you.
Thank you for your participation, ladies and gentlemen. You may now disconnect. Goodbye.