Ladies and gentlemen, welcome to the first quarter 2020 media conference call. I'm Sarah, the conference 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. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Elena Logutenkova. Please go ahead, madam.
Thank you. Good morning and welcome to Swiss Re's first quarter results media call. I'm Elena Logutenkova, Head of Media Relations & Corporate Communications. I am joined today by our Group CFO, John Dacey, who will give you a brief overview of our results and then answer your questions. John, over to you.
Thank you, Elena, and good morning. Thank you for dialing in. These are the first quarterly results where we've seen the impact of COVID-19, and I will explain how this is reflected in our figures. Swiss Re entered the situation with a very strong capital position. We also took proactive measures which successfully protected our investment portfolio and the balance sheet from a larger impact, which I'll also elaborate on. Let's take a look at the three main drivers of the quarterly net loss of $225 million. First, we book losses related to COVID-19 in our property and casualty businesses of $476 million. This primarily covers expected claims for canceled or postponed events. As usual, we followed a prudent approach and established reserves as a result of claims notifications, as well as evidence of expected claims materializing through the end of March.
As previously communicated, our total maximum exposure to event cancellation across 2020 is a mid to high triple-digit million amount. This is skewed towards the first half of the year in terms of events covered, which means we would expect to book most of the losses in the first two quarters. Second, on the investment side, market turbulence was responsible for a U.S. GAAP net valuation loss of approximately $300 million. As you know, the first quarter saw one of the sharpest sell-offs in recent history, with significant volatility affecting most major asset classes. In anticipation of challenging markets, we put in place credit and equity hedges in the early part of the quarter. This helped us to substantially contain a higher gross impact of market turbulence through gains of approximately $650 million attributable to those hedges.
Third, the first quarter result was also adversely impacted by a mark-to-market valuation of the Phoenix Group shares, which Swiss Re will receive upon the completion of our sale of ReAssure to Phoenix, which we would expect to complete in the third quarter. Despite these challenges, Swiss Re maintains its industry-leading capital position with our group SST ratio comfortably above 200% as of the 31st of March. We remain a strong partner for our clients, and our business is resilient. Over the past weeks, even with most of our staff working from home, our business continued to run without interruptions, as evidenced by the very successful April renewals. We posted a strong investment result for the quarter with an ROI of 3.2%, thanks to the proactive hedging and the portfolio management actions I mentioned earlier.
All of our business units are performing strongly if we adjust for COVID-19 impact. Let's have a look at them individually. On P&C Reinsurance, we reported a net income of $61 million, despite the losses related to COVID-19 of $253 million and $397 million in large natural catastrophe claims. Excluding the impact from COVID, the ROE of P&C Re was at 13%, in line with our target range of 10%-15%, and the business unit is on track to reach our combined ratio estimate on a normalized basis of 97% for the year. We're also very pleased with the April renewals, which were particularly important for the Japan market. We achieved a treaty premium volume increase of 4% and a nominal price increase of 8%, with particularly strong nominal price increases for Japan windstorm risk of more than 50%, reflecting the recent loss experience in Japan.
Risk-adjusted price quality year to date remained unchanged, reflecting lower interest rates and the material adjustments to loss assumptions. Life & Health Reinsurance delivered a net income of almost $300 million and an ROE of 15.8%, well above the target 10%-12% range. This reflected strong underwriting and investment results. To date, we've not seen a noticeable impact either on mortality or in our critical illness book for claims related to the COVID-19 pandemic. From what we've observed so far, the virus disproportionately affects older populations with an average age for fatalities above 80, while 90% of our Life & Health Re portfolio covers individuals aged 60 and below. Corporate Solutions reported a net loss of $167 million, impacted by $223 million of losses related to COVID-19.
Again, most of these losses are reserves posted for anticipated claims related to event cancellations. This is a line of business that Corporate Solutions decided to exit in the restructuring it announced last year. Therefore, our exposure is below what it could have been otherwise. In particular, the events that we're responsible for ensuring tend to be front-loaded in the first half of the year. Excluding the COVID-19 related losses, Corporate Solutions' normalized combined ratio was 103% in the quarter. This is in line with our 105 estimate for the year and a 13 percentage point improvement from the year earlier period. The strong pricing momentum experienced in 2019 for CorSo has continued into 2020, with Corporate Solutions achieving a price increase of 13% in the first quarter. Given the current market conditions, we expect this trend to continue.
Life Capital's net loss of $261 million is almost entirely attributable to the mark-to-market adjustment on Phoenix Group shares, as mentioned earlier. This has no effect on the agreed sale of ReAssure, which remains on track and is expected to close in the third quarter, as I mentioned. The open book business continues to perform strongly, with gross premiums written increasing 20% year-on-year in the first quarter. To sum up, it hasn't been an easy quarter for the entire industry, and of course, our financial results reflect this. More importantly, our underlying businesses continue to perform well. We took timely and substantial measures to protect our balance sheet, and we maintain our industry-leading capital position. With that, I'll hand it back to Elena to manage the Q&A.
Thank you, John. We'll now open the lines for questions. Operator, could we take the first question, please?
The first question from the phone is from Marion Halftermeyer from Bloomberg News. Please go ahead.
Hi, Elena. Hi, John. Thanks for taking my question. I was wondering if you could elaborate a little bit more on the losses versus the reserving. I'm just trying to square the P&C numbers. You say you had the $476 million charge, so I'm assuming that's based in loss, but then there's the $253 million from the little subsection. Is that just future reserves not baked into the loss, or am I reading that correctly?
No, sorry. Let me see if I can clarify. The $476 is for the group. The two places that arise is in the P&C Re. The P&C Re is part of the $476 is a $253, and in addition, in CorSo, there's I think $223 million of losses. Those two numbers added together will get you to the $476. When we say losses, in many cases, we've not seen the specific claims presented to us, so we've not paid this money out. We've done our own forensic work to try to anticipate which events either have publicly been postponed or are highly likely to be canceled or postponed and put those reserves up as of March 31st. Again, there are more events which will be decided upon in the second, third, and fourth quarters, and we'll have to address those as they occur.
Okay. Thank you. That's helpful. That clarifies my question. The other follow-up I had to that on the reserves is that in the Life & Health division, you actually said you had no impact from COVID in this quarter. Do you expect to be having some impacts in Q2 or Q3?
It's just very difficult at this point of time to try to estimate where claims are going to come through. What we can say is that the health crisis continues to exist, even if in certain countries we seem to be over the hump of at least the first wave. It's going to be challenging to understand what the total impact is going to be on mortality in the course of 2020. We're working very closely in the reinsurance business with our primary clients. We want to be sure that we're doing everything we can to assist people that are directly affected by this. As I said, for the moment, the overlap between those populations most affected by COVID-19 and the insured populations in many country is not large.
Okay. That's helpful. Lastly, I was hoping you could elaborate or clarify a little bit more. In the asset management section you have this net unrealized losses of $5.5 billion. How do I read that? Is that losses you expect to take later because it's unrealized now?
Under our U.S. GAAP rules, the deviations for listed equities, even if we continue to own the equities, have to be written down in the quarter where their value declines. In addition, we've got a series of non-listed equities in our private equity portfolio in another portfolio we call principal investments, which we've evaluated in terms of relative movements of either underlying positions or comparable positions in the public market. Taken altogether, the first quarter impact for our P&L would have been approximately -$950 million. Against that, we had the positive impact of the hedges, both on equities and in some cases on the credit portfolio, the corporate bond portfolio that we have in the group that had a positive impact of about $650 million. The net difference that was booked into the P&L of Q1 is about a $300 million decline.
Okay. Thank you.
The next question from the phone is from the line of Paul Arnold from Reuters. Please go ahead.
Good morning, gentlemen. Do you hear me?
Yes, we do, Arnold. Please.
Okay. Sorry. In the first quarter, COVID-19 cost P&C and Corporate Solutions nearly half a billion, as you said. Can you estimate what costs Swiss Re will face due to the pandemic going forward? You said that most of the losses are expected in Q1 and Q2. Do you have any estimate for the losses for the industry coming out of COVID-19?
Yeah. I understand the question. Unfortunately, at this point of time, we don't have a good answer for you. The way that I think about this, we are in the middle of a slow-moving storm. There's the underlying health crisis with the pandemic, and in most countries we remain in the first wave. We've seen even in what we would consider well-organized countries like Singapore, the risk of a second or even third wave of infections coming through, that you should not exclude for other countries. That's the starting point. On top of that, we obviously have an economic crisis, which has been exacerbated by the lockdown procedures that many countries have put in place. The net impact of these lockdowns, I think is still being evaluated across economies.
The massive intervention of governments and monetary and fiscal policies, also unprecedented, is very difficult to predict in how all of this will intervene in terms of not just society losses, but insured losses as we go forward. It's very difficult for us to make any predictions for what the industry losses will be, or frankly, where Swiss Re's potential losses. One clarification I would make on the front loading of the year for losses related to event cancellation, that's only event cancellation. As we said, we've got many exposures during all four quarters. They tend to be larger in the first two quarters than the second two quarters, but it doesn't mean that we don't have any event cancellation losses there.
Okay, thank you. A second question, if I may. There are efforts to make the insurance industry, which argues that pandemic damages is often not covered to pay more. How do you view this? Do you expect, let's say, a kind of flood of lawsuits?
Again, Swiss Re in business for 156 years, has a strong reputation, and a deserved reputation, I believe, for fully paying all the claims we're responsible for, and we will continue to move forward in this pandemic in that spirit. I think at the same time, it's important that our shareholders and other stakeholders don't expect us to pay for claims that we're not responsible for. In certain cases where people have chosen to pay additional premiums to include coverages, oftentimes in what would be a supplement for a property policy that would be covered for pandemic-derived losses, we're happy to pay those losses. In those situations where people attempt to make claims for businesses closed, not because of physical damage, but for the pandemic when the policy does not cover that, you should expect us not to volunteer our shareholders' funds to cover these losses.
Okay. Still the question, do you expect a lot of lawsuits in connection to this?
There may well be disagreements over these coverages. We'll defend ourselves appropriately, but more importantly, we will pay, and we expect to pay those losses which we are responsible for.
Okay. Thank you.
The next question from the phone is from the line of Tom Sims from Reuters. Please go ahead.
Yeah. Hi, good morning. Just to follow up on Paul's questions. The $476, how much of that is Olympics related?
We don't specify the specific amounts related to specific covers. The Olympics was a large cover. There are actually multiple policies to multiple entities related to the Olympics, this is what our losses related there are a mix of positions vis-a-vis those policies. Again, we did flag that our gross exposure on that was the largest single exposure we had on events.
Okay. You couldn't say it's 50% or just sort of a qualitative amount or?
Unfortunately not.
Okay. We wouldn't be wrong in our choice to highlight the Olympics sort of up high.
Say the Olympics are a part of the event cancellation. The event cancellation is the majority of the $476.
Okay, thank you.
The next question from the phone is from the line of Thomas Ingartner from FuW. Please go ahead.
Yes, good morning. Question goes to the renewals. Maybe you could tell us a bit more on the size of the portfolio that had been renewed in April. Is it correct to assume that the gross written premiums increased in nominal terms, but the risk also increased so that the price quality sort of is stable? There's about the same margin in it on a bit higher volume. Is that a correct assumption? The second question is, at the very end of the text, Christian Mumenthaler alludes to some sort of finding solutions together with governments, to me it seems. Can you explain a bit on what sort of solutions he tries to think to get ahead? Thank you.
Sure. On your first question.
Renewals
on the renewals. An important dimension of this renewal was an assessment that our technical underwriters have made that the model we had in place for the loss expectations from typhoons in Japan, both the wind damage, but especially the flooding damage, was underestimating those losses. We took the experiences of Jebi, Trami, Faxai, and Hagibis in the last two years to do a major reevaluation of the economic cost of these typhoons. We shared this information with our Japanese clients and other clients that have Japanese exposures and basically said, "If you want these risks covered, we're going to have to receive a materially different level of premiums." In some ways it's the same risk, but just with a different valuation of what ultimate losses will be.
On the windstorm, we were able to get this very strong double-digit increase, which fed into the entire renewal of an 8% nominal increase. When we say nominal, we mean that is a result of our own redefinition of expected losses, as well as the reality on the investment side of lower interest rates, such that the prices we achieved were largely sufficient to continue to write this business with a similar level of profits that we had previously. Overall, year to date, the margins are stable, but that's with a more pessimistic view of what the cost will be for losses associated with this. We think our Nat cat book is both a very profitable book in normal years as well as a strong, important book for the industry. We're happy to see this grow in most markets.
We'll have the renewals in June and July focused in the United States, and especially the Florida windstorm. We look for continued improvement in pricing in those markets. The last part of that question, about 15% of the book renewed in April across markets, again, dominated by Japan. On the outlook, Christian does talk about public-private partnerships. I think one of the things which is clear to the world today is that the economic cost of pandemics is more than any single industry, whether it's the insurance, the banking industry can manage. We believe a little bit like we saw after 9/11 with the implementation of the TRIA program in the United States, that there may be a role to work with governments for the true extraordinary event where the insurance industry can, as it does today with some exposures to terrorism, play a role to manage pandemics.
I think most importantly, what we've seen is the importance of preparation for managing future pandemics is clear. COVID-19 is a terrible event, but it's not going to be the last one. As a society, it's incumbent upon all of us to do what we can to learn our lessons. We saw this frankly in working with local governments in New York and New Jersey after Hurricane Sandy, where the resilience of the cities and the states fundamentally changed as a result of analysis that we were able to do together with them about what had happened, why it happened, and what you could do to make the cities more resilient. I think the pandemic issue is complicated. The great news is we've got a bunch of scientists capable of assisting the world to understand the scope of the risk as well as what some reasonable approaches might be.
Thanks. Thank you.
The next question from the phone is from Oliver Ralph from Financial Times. Please go ahead.
You've actually answered most of my questions, but just a couple of follow-ups. First on the details of the claims you said mostly from events. Could you give us some idea of what other sorts of claims that you're facing? The other question, just really to follow up on your last answer about public-private partnerships, do you think that this is needed just to address future pandemics, or do you think any new scheme has to be wider to address other sorts of perils?
I think your second question, once we've unambiguously have the COVID-19 crisis under control, I think the focus with governments and in some cases, international associations can and should focus on pandemics to the degree that this is clearly a risk which is too big for the industry to manage itself. There's an accumulation risk that even a company as well capitalized as Swiss Re simply cannot manage on its own. The industry itself cannot manage the level of economic losses from a business interruption. What we can do is potentially assist ways to facilitate a better response and having some sort of a backstop by governments like we do with TRIA in terrorism may be an approach that's worth pursuing.
I think for natural catastrophes, what we've been able to do not only is to organize the industry to manage most or lots of the risk, but also in some cases, organize capital markets through the alternative capital sector to bear natural catastrophe risks. I think having capital markets bear pandemic risk is more complicated, but also should not be excluded from part of the potential solutions there. Your first question on where other losses come other than event cancellation, there's a couple different lines of business in the P&C which have exposures. Clearly, the credit and surety where we didn't see a lot of COVID-19 related losses crop up yet. You would expect over the next quarters there may be some. That again is complicated by the fiscal stimulus measures in certain countries that have been targeted at maintaining an orderly credit insurance market.
On business interruption, as I mentioned, there are some policies which have sub-limits that are not restricted to physical damage. In those policies, as we see clear and covered claims reported, we'll manage those. There hasn't been too much in the first quarter. That will be something we'll work with our insureds and our primary companies with as well. I think that's most of the sources right now. Again, it's very difficult to predict how these losses will come and the magnitude of what the industry will face here.
Thank you.
The next question from the phone is from the line of Ben Dyson from S&P Global Market Intelligence. Please go ahead.
Hi. Good morning. I was just wondering if you could say whether you expect the coronavirus crisis to have an effect or to reduce Swiss Re growth rate and premium because of lower economic activity. If the reverse is true, whether you're seeing greater demand for insurance cover because of the uncertainty. A second question as well. Obviously, the capital raise is strong at the moment, but do you envisage a point where you might need to raise more capital?
Your first question, I think you almost answered in asking it. The reality is, with reduced economic activity, there may be, especially on some of the proportional covers we place, a lower amount of premiums that get written in 2020. Exactly to your point, we expect, especially in the second half of this year, frankly, a potential increase in demand as our primary insurance companies in particular are looking to modulate the risk profiles that they currently have and potentially gain some assistance in their own capital structures that reinsurance can deliver. Again, one of the reasons why we've protected our balance as much as we have is with the belief that there will be some interesting business opportunities for us as we start to come out of the actual crisis, and we want to be sure that we're fully ready to serve our clients.
With respect to capital, again, as we speak, we're very comfortable with the capital levels we have with expected premium volumes. If there seem to be massive opportunities in the future, I don't exclude the possibility for that kind of growth serving our clients that we deploy more capital. There's, in my view, no need today to think about any sort of external reinforcement. I'd remind people that we do have sitting on the sidelines a contingent capital facility accessible to us at our demand of $2.7 billion in addition to what's currently included in the calculation for the SST ratio. We're feeling that we remain very robust as we're some months into this crisis. Thank you very much.
As a reminder, if you wish to register for a question, please press star and one. The next question is from the line of Friederike Krieger from Versicherungsmonitor. Please go ahead.
Good morning. My question has already partly been answered. I was wondering if you see opportunities arising through the crisis. You already said in the second half there may be an increase in demand. Do you also think there will be an increase in reinsurance prices due to the COVID crisis?
We were coming into 2020 expecting a continued firmness of pricing for the reinsurance market. I think there's nothing that's occurred that would make us believe that that firmness would not be accelerated. There has been some real capital losses in the industry as a result of the asset side. In particular, you've seen some people report declines in their equity of billion-dollar plus positions. In addition, the risk appetite for some of the players may be decreased given the uncertainty around future losses related to COVID-19. Our expectation is demand, if anything, will increase. Supply does not seem to be increasing at this point of time and may be decreased as a result of the balance sheet losses some players have experienced. As a result, that's probably a good thing for reinsurance prices.
Thank you.
Once again, to register for a question, please press star and one. The next question is from the line of Patrick Winters from Bloomberg News. Please go ahead.
Good morning. I'm following up on one of your comments earlier, John, about the maximum exposure this year for COVID-19, and I believe it was a mid to high triple digit amount. Could you just clarify what that means? Was that mid to high triple digit million dollar ?
Patrick, yes. We explained that we had a $250 million gross exposure for the Olympics and a series of other exposures. When you add them all together, yes, it's a triple digit million exposure. This is only related to the event cancellation sub-segment. There are potential other losses which might or might not come through with respect to our mortality book, with respect to business interruption on property policies, with respect to credit and surety, none of which we've attempted to estimate publicly, because it's simply very, very complicated at this point of time to put anything definitive out there. On the event cancellation, we can be definitive because we know what our gross exposures are.
If every event in that portfolio gets canceled, it would still be less than $1 billion of losses.
Could I just follow up there? Interesting you mentioned that on business interruption, you haven't formally given a public estimate. What are your thoughts around that? Because I'm noting some legal cases in the U.S. based around business interruption. Which way do you think the industry's-- are you prepared for that in terms of which way will courts side? Are they going to make insurers pay for business interruption or not?
I'm not in the business of trying to estimate where court decisions will land. What I can say is we do expect contract wording to matter and rule of law to be exercised in jurisdictions. As a result, as I mentioned before, on those policies where we are on risk, we'll work with our clients and pay the claims that we're responsible for. In terms of ex post revisions of coverages that premiums were not paid for, we don't expect and would resist attempts to make the industry broadly and Swiss Re specifically pay.
Thank you.
The next question is from the line of Rachel Dalton from Insurance Insider. Please go ahead.
Good morning. Thanks for taking my question. Could you tell us a little bit more about what you expect from the 1/6 and 1/7 renewals? Also, could you talk about how much of an impact you think COVID-19 will have on those?
Rachel, the indications we've got that are obviously preliminary are that there is real demand out there. People may be looking for covers down a little lower on the reinsurance programs. We also think, to the degree that the ILS market is relevant for this space, the specific requirement of capital market players that all COVID related losses are absolutely excluded from any cover they might be responsible for, I think, just reinforces the discipline of the market here. Our expectations are that this has the opportunity to be a strong renewal for Swiss Re, where pricing adequacy, especially for the Florida market, could return to more rational levels from what had been underpriced risks for multiple years. We'll participate accordingly. Our goal is to find opportunities to put this capital to work.
These two renewals may provide, frankly, a little more opportunity than we might have thought at the beginning of the year.
Okay. Thank you.
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