Swiss Re outlook revised to negative by S&P as underwriting deteriorates

S&P Global Ratings has revised its outlook to negative from stable on global reinsurance giant Swiss Re and its core subsidiaries, citing uncertainty around its underwriting performance.

At the same time as revising the outlook on Swiss Re, S&P has affirmed its ‘AA-‘ issuer credit and insurer financial strength ratings on Swiss Re Group’s core subsidiaries. Swiss Re announced recently that the impact of the COVID-19 pandemic adversely hit its first-quarter 2020 results, with the company reporting a $225 million net loss for the period, which included an underwriting loss and an investment loss.

“The negative outlook indicates the possibility that we could lower the ratings by one notch if the underwriting performance of Swiss Re’s P/C business does not perform broadly in line with our expectations,” explains S&P. The ratings agency states that the firm’s underwriting performance has deteriorated in recent times as a result of the challenging pricing landscape in its P/C operation as well as the underperformance of its primary business. According to S&P, P/C challenges in part stems from large nat cat claims, COVID-19 impacts, and mark-to-market losses as a result of stressed financial markets.

“While much of this underperformance is attributed to COVID-19-related losses, these are not driving the outlook revision as we anticipate other re/insurers will experience similar losses through the year,” continues S&P. Based on reported results, S&P says that underwriting performance of Swiss Re’s P/C operation makes the group a negative outlier relative to close peers, partly driven by higher nat cat exposure than peers who have been able to benefit from favourable prior-year reserve developments. In addition, Swiss Re’s Corporate Solutions arm remains challenged despite efforts to improve underwriting results, and this has served to constrain the group’s weaker performance, says S&P.

“Though we take into account Swiss Re Group’s strong brand and large scale, diverse business profile by geography and lines of businesses, we believe that there is uncertainty around the underwriting performance of the P/C reinsurance business, particularly in the U.S. casualty lines, and the turnaround of the CorSo business. Our negative outlook reflects this uncertainty, which may influence our view of the group’s competitive position that we currently see as excellent,” says the ratings agency.

As a result of the pressures facing Swiss Re, which includes potential further COVID-19 related claims and the lower investment yield environment, S&P has reduced its earnings expectations for the group. For 2020, S&P forecast that Swiss Re’s P/C unit will likely post a high combined ratio of 107%, and group-wide return on equity of 5%.

“We expect the group to improve its earnings over 2021 and 2022 through pricing increases across its P/C business, as well as the benefits from corrective actions taken in relation to CorSo. Over this period, we forecast an annual combined ratio of 99% for the group, with a ROE of 7%, mostly driven by life business and investment returns,” says S&P. The impacts of the COVID-19 pandemic are far reaching and it’s becoming increasingly clear that no one company is immune from the economic fallout.

Source: Reinsurance News