Swiss Re AG (SREN) Earnings Call Transcript & Summary

Good morning, good afternoon, everybody. Welcome to Deutsche Bank's 10th Annual Global Financials Conference, albeit in a slightly different capacity this year. My name is Hadley Cohen. I'm part of DB's European Insurance Research team. I'm delighted to present today Mr. Christian Mumenthaler, Group CEO of Swiss Re. Christian has been at Swiss Re for over 20 years now, spending the last 4 years, give or take, as Group CEO. And I think 5 years prior to that, the CEO of the Reinsurance division. And I'll shortly hand over to Christian to make some opening remarks before beginning the discussion. [Operator Instructions] And with that, I'll hand the floor to Christian.

Thank you very much, and hello, everyone, wherever you are, I hope you're healthy and safe, especially, I guess, you're more to the west, you're probably a bit early in the process. So maybe just a little sense of normality coming back here in Switzerland. We're here in the office -- in our offices, back in our offices, sun is shining outside. Schools have opened more than 2 weeks ago, shops have opened more than 2 weeks ago. And so far, the virus seems completely under control. We had 15 new cases yesterday, which is 1.5% of the peak, what we had in the peak. So it's nearly extinct here. It doesn't mean it won't come again, but for now, everything seems to be going fine. So in case you wanted a little bit of good news in these darker times, I thought I'd just share that. So in terms of opening remarks, I'd say that overall, we feel really blessed, right, to be in an industry where the demand is not changing drastically as it does for many other industries. In fact, if anything, demand is going up for what we sell. And operations, we have been able without any problem to switch over to home office because since years, we have this "Own the Way You Work" concept where people have a laptop and we have an infrastructure, Internet, everything that makes it possible with our problems to work from home. So it was 0 disruptions, we could do the Japan renewal, everything is fine, up and running. So I think we're really blessed. We also entered this phase with a very, very strong capital base, which is now actually paying off. Now it doesn't mean we won't have losses, obviously, this is a big event for the industry. It's still early on to say how big it's going to be. I'm sure you've read the various analyst reports. You have everything from, I think the lowest figure I heard is $10 billion; the highest, $140 billion, but I guess the consensus at this stage with a huge uncertainty, it's more around $50 billion to $100 billion. To put that into context, the year 2017, the overall net cat loss of 2017 was $144 billion. So the event is large, but it's within what we have seen in the industry so far, is just that it has different characteristics. It's going to take longer to understand it. It's going to be messy and there's a significant fear factor attached to it since it's also about life and death. So that's about the loss. And you could see Q1, I think the sum of what was announced is $6 billion or something like that, so only a tiny fraction of the overall loss was known by the end of Q1 when people had to close their books. The losses are going to come from different areas and they will, I think, materialize in the P&L at different times. The earliest materialization is the event cancellation business, which is sort of a niche business. But where it's relatively easy to estimate the loss. And I think the companies like ours, they basically looked at the events this year, what is covered, what is going to be canceled or known to be canceled, even if we didn't have an official claims, we assumed an IBNR for that in Q1. So that's probably the easiest one to estimate and to put a maximum amount around it. And then there's a series of other businesses that might or might not be touched. The one that's clearly going to be -- probably the biggest one is business interruption. It is not commonly covered in business interruption. Business interruption is part of the property policies where you need a physical damage, but there's a sub portion of primary policies that have a significantly smaller sub limit of nondamage BI that will aggregate through and makes large sums when you aggregate everything. Though we don't have the details yet, but that's our estimate currently that this is going to be a big part of the overall industry loss. Then a big unknown around credit and surety, that would materially more as the financial effect of the crisis becomes visible. So that's even later. There could be losses in casualty, D&O, et cetera, very hard to assess at this stage. Also, I guess, later. Life & Health, the mortality side, there's going to be losses in Q2 as you could see mortality go up in some of the countries like the U.K. and the U.S., obviously, unclear, how much of that is just acceleration. How much of that is life that would have gone on for much longer. And then possibly some disability losses as the financial crisis -- as you have a financial crisis, recession, people having more mental issues, et cetera, but that could also be delayed. So there's a significant work to be done. There's a lot of things to be understood, and things will come over -- will come through over time. But overall, everything we see at this stage is a manageable event for the industry and for us personally. It will lead to hardening, that's our belief, right? We were in a slightly hardening market now for years. We think that it's going to lead to acceleration. That's the early sign we're seeing right now in the market. This event reminds me more of 9/11, where I was already at the -- at Swiss Re because of the fear factor, the unknown, the impact on the financial markets. I mean there's many things I can see in terms of parallels, and also people thinking it's going to change the world forever. And in the end, it changed the world slightly, but it was not a complete change of the world as we knew it. And I think the same thing will happen in this particular case. So we see signs of acceleration and hardening, but I'm sure there's going to be questions around that, but at this stage, too early to say anything. But I think overall, we feel we were in a good position entering the crisis. The business model makes complete sense. We do what we are supposed to do, which is to absorb some risk for society. The overall amount should be manageable, and we're obviously a bit more positive or quite a bit more positive about the future of the industry. And I guess with that, I think we can move over to Q&A.

Great. Thank you very much, Christian. And I'd like to start with some things that you touched on in the beginning of your remarks around the sort of the increased demand and the buying behaviors for reinsurance. You're talking about an increased demand. Can you talk a bit more about where you're seeing that maybe by line of business or by geography? And do you anticipate that these increases will be enough to offset the broader structural pressures that we're seeing in the market?

Yes. So I think -- I mean, just to put it into context, we're not renewing everything right now. So I don't have a full picture. Most of the business renewed 1-1. So there's very little one can say about 1-1 renewal here. So at this stage, what is renewed is more the Florida business that's a very small subpart of the portfolio, which has gone up significantly last year. But we clearly see, again, significant upwards pressure. Look, some clients wanting to buy more. I think reinsurers are reluctant to write too much more from what they had last year. So we just feel very different dynamics in the tone, right, but obviously, we'll see in the end, what comes out. It is too early to say, but we see a lot of encouraging signs in terms of the overall market dynamic. That's in Reinsurance, obviously. In Corporate Solutions, we see price increases now for more than a year and they are sustained. They continue to be of significant nature. I think you also have a little bit, but that's more ad hoc feedback from brokers. I think a lot of client appreciated that. Big companies were maybe more prepared. Operationally, we could immediately switch over to working from home to -- we could -- there's no interruption in client service. Everything is working fine. We're paying claims. And therefore, I think also in terms of fear, I would anticipate some benefit of this flight to quality, which is, I guess, a normal psychological reaction. So going to the bigger names, that should help us. But it's too early to make a sweeping statement across all lines of business. All I can say -- and what is being renewed right now, which is mostly Florida, we see lots of encouraging signs.

You anticipated my next question around the whole flight to quality. I think that's probably a very valid point. If we can turn the attention to social inflation, I mean, I think that's been a key topic of discussion for Swiss Re in recent quarters. Can you give us an update on how you're seeing trends in the U.S. casualty lines developing? And to what extent you think the current COVID crisis can impact that?

Yes. So I think we should talk first about the underlying, if you want, like a slow-burning natural catastrophe before we talk about Swiss Re, what it means for us and what we're doing. So the underlying is really a bit, in my view, a system out of control, right? So you have multiple factors like whatever millennials and the juries, anger against big business, hedge funds defining that as a new asset class, lots of lawyers that came into work after the great financial crisis, not enough case. Also in terms of different factors that led to aspire [Audio Gap] comes from motor, but also in other areas, which seems to be seen as a social redistribution system. And it's -- I think it's broken, right? It's broken and it will have to be fixed. It always will be fixed at some stage, but that will need counterpressure. The counterpressure, in my view, one of the ways this could build up is through increased insurance prices. If people can't buy insurance of businesses, can't buy insurance anymore. They will go to the politicians and say, this is unacceptable. And then you start to have to counter position. Hopefully, at some stage, leading to tort reform. I can't see anything else coming out in the end. But the question is how long does it take? And I can't see that happening right now. I think COVID-19 might lead maybe to a delay of some of the legal process overall, but I can also see a new floods of things coming into the U.S. legal system. That's how it seems to react usually by -- I mean, tons of things will be tried and the tax will be tried. So I'm not particularly optimistic on this. I think it will be ultimately fixed, but I don't think that's going to be a short-term thing. So as a consequence of that, I think it's also really hard to anticipate several years in advance. How this is going to look like. So in the Corporate Solutions space, we exited the U.S. casualty business for that reason. I think it's just too hard to predict correctly. And in Reinsurance, where we have a much more diversified portfolio since years, we try to steer away more and more from these large corporate risks, which are the most attacked. It's sort of the focal point of the attacks since it is more social redistribution then I would say, justice, that's really the sector that gets most touched. So it's a really more portfolio rebalancing in reinsurance that's going on and continues to go on, where we try to get as underweight as possible in some of the subsegments. At first, I have something attractive comes like 1.5 years ago, we had opportunity to write a big treaty, which is more short-tail workers comp for SMEs. That's a totally different risk of the casualty U.S., but we feel much more comfortable with that. But I can continue to see us moving away. And then on the reserving side, obviously, we always try to come up with best estimate reserves with whatever information we have. And at some stage, the reserves will be adequate. In CorSo, we did have -- we had no movements in Q1, which is encouraging. It doesn't mean we won't have any in the future, but it's encouraging. Because so far, it seems we got the reserves right because even if it worsens at some stage, all the worsening has been put into the reserves. Reinsurance, we still saw some movements in Q1, so too early to tell. Hopefully, it's just a delay factor between the 2 businesses. Of course, we're one step closer to the front, whereas in reinsurance, we rely on our clients delivering us the information. So hopefully, for us, the crisis is soon over. But I cannot make forward-looking statements or guarantee anything. I can just tell you that we try at any point in time at the closing to put up what we think is the best estimate.

I mean, I guess the vast majority of social inflation issues or all social inflation issues are related to the U.S. liability lines. I mean to what extent do you think there's a risk, like a contagion risk? Perhaps into maybe other Anglo-Saxon markets or other lines of business or other countries? And how are you positioning the portfolio in that respect?

Yes. In the -- actually in the last crisis in casualty U.S., before we had the Bush tort reform, there was a lot of fear of this swapping over to other countries. And there was some initial starting points. And certainly, this lawyer community be very interested to propagate that in the U.K. There's a bit in France, sort of at the beginning of a tort law. I think Australia is another country where some of these practices are taking hold. It didn't happen then afterwards. And also now, we haven't seen the same extent, right? You see attempts, et cetera, but I think it's just culturally quite different. And I don't think that -- while you might see some of that, I don't think that the societies -- these other societies would accept the kind of system that you see in the U.S. where a lot of the money goes to the legal profession, a huge amount of it, I think, is like half of it or so. And where people have to pay, despite a police report saying that it's not their fault in an accident, things like that are just, frankly, bizarre, right, for a lot of other cultures. And I don't think you will see anything close to that happening personally at this stage. And we try to observe it, don't know if it's going to happen in 10 years, but I don't think so.

You've touched on the Corporate Solutions business a couple of times already. I mean I think it's fair to say that we've seen continued underperformance from this division in recent periods. Are you rethinking your strategy here at all? And how confident are you with regards to 98% combined ratio for next year? And what have you?

Yes. I think it's very fair to say that. Yes. There's no way we're going to be happy with that kind of performance. I think the Corporate Insurance segment generally has been extremely poor, right, the last few years. It had some good years, but then the last few years, the pricing went down probably 20-plus percent, 23% or so, which is massive when your margin is lower than that, right? And so we see the whole -- it's not just Swiss Re. I mean we're part of it, and we're probably one of the worst, certainly on paper. We obviously had the reserve of the good years, they will remain in Reinsurance, as some people know here. So once we net out everything, I'm not sure we're much worse than the rest. But clearly, we're creating a new course or like a start-up, keeping the good reserves, which had released a lot of profits during the same time in reinsurance. This -- to a certain extent, in CorSo, you sort of see maybe more honest picture of the actual performance of the younger underwriting years in the markets. And it has been very poor and just cross-subsidized by investment income and reserve releases from good old years. So very disappointing. And therefore, also strongly reacting right now because most -- many Corporate Solution player, the large corporate segment is, it's just a part of the insurer's portfolio that sometimes heavily reinsured, but there have been bad losses a bit everywhere. And so the market is reacting very strongly already last year. That was, I think, just enough to catch up with the social inflation, claims inflation, maybe some under-costing that's been going on, but it just continues in an unbroken way. So of course, we ask questions all the time. That will definitely be the wrong time to sort of get rid of that business. In my view, it's the time where you see heavy rate increases and you're going to see -- and I'm very confident we can do the 98% by 2021 because the cost side has been dealt with, more or less 100%. The underwriting side is also very well on track, the pruning, everything is on track. And the rate increase, if anything, are higher than what we're seeing. So obviously, COVID is going to have another loss on top of everything, but in terms of the underlying business, I feel very confident we can get there. And I would say, strategically, long term, this is interesting to have access to the corporate sides as access to risk. So I think -- I know the mood is not there. People want to see the result, but I think -- no, I've seen many businesses in bad shape in my 20 years at Swiss Re. And that's definitely not the right moment to thinking about selling it. So we stay with it, right? We do everything. We try to fix it. We're maybe a little bit ahead of others in terms of fixing it, which led to more uglier result than others. But underneath it, I can see with these price increases, inevitably, it's going to get much better.

If we sort of change direction slightly now and move more towards your capital position. I think with the 1Q results, you stated that the SST remained comfortably above the 200% level. And how should we think about this in the context of your -- the previously discussed threshold of 220%, first of all?

Yes. So I mean, the -- we have the Swiss Solvency Test in Switzerland, which I think is more stringent than Solvency II. It's about 20, 30 points more stringent, and that's the Solvency II. That's the conservative version of Solvency II. If you go then into some of these matching adjustments, et cetera, you can have even higher rates. The threshold for the regulator is much low, it's 100%. So these 200%, 220%, that's just the Board delegating to management risk taking up to that level and can be changed any time by the Board. That's not a binding constraint. That's just a guiding principle in the years before the crisis that we have followed, thankfully followed, right, because it gave us the good starting position we have now. So that's not a -- that's an internal thing, not a binding constraint. But yes, clearly, I think everywhere you see probably, I don't know, 30 points have been wiped out of the solvency ratios, maybe more in insurers and reinsurers everywhere, and that's obviously part of helping the hard market. So that's a clear positive. But in terms of us being able to take risk, there's no limit. I mean, no limits, there's no -- we don't feel any particular limitations. We feel in a position to be able to profit but I have to say that the biggest opportunity right now, in my view, is increase the profitability of the existing business rather than trying to grow a lot. I think that's more important, and the opportunity now is here to increase the profitability of the existing portfolio. So I'm not sure if that answers your question. But that how we're seeing that.

Yes, I mean, is there any -- I mean, how should we be thinking about excess capital for the business at the moment?

Excess capital. We never talk about excess capital, right? I know analysts like to talk about excess capital. We just have a certain capital level, right? We had a very comfortable capital level. And we have an unchanged capital management policy, which says we need a strong balance sheet, then we want to have -- we paid the dividend and to increase the dividends. Then the third priority is to deploy the capital to the business. And the fourth one is, if we can't do that, we do share buyback or we find another way to redistribute the capital to shareholders. And that's what we've done the last few years. Hopefully, this changes that dynamic. Obviously, the -- we really have a strong capital. The dividend is top priority. But then hopefully, finally, we find some opportunities to deploy. And we have seen, right, the loss to be fair, the last 2 years, some opportunity to deploy the capital to business, which should be a good news for shareholders. So I think the share buyback or similar things could happen, but they shouldn't be seen as a given in this environment. That wouldn't make any sense.

Yes. I think that's fair. I mean do you think that -- you sort of touched on it just now, but I mean, in light of the dividend commentary that we've seen across the sector more broadly in the last few weeks, do you think it's fair to say that the dividend attraction of the sector is perhaps not as strong as -- or the capital return attraction is perhaps not as strong as it could be. And therefore, the industry as a whole will start shifting its capital deployment more towards organic and inorganic opportunities on the other side of the crisis?

Well, I'm not sure, I think you saw very different reactions on the dividend side. If I start with the capital generation, right, the Swiss Re's last 5 years, which includes some of the worst years, right, it was about $9 billion over 5 years, the capital generation, including everything we have gone through. So I think the capital generation will be here. Obviously, there's a COVID hit, the one-off hit on whatever the final amount is. On the other hand, prices go up, right? And it's a leveraged thing, right? When they go down, it's leverage, when they go up, it's also leverage. You have fixed cost and other things. So it's pure margin. Everything that you have on top margin, I mean, pretax margin. So that is, in my view, very attractive. Yields will probably come down, et cetera. So you have counter effects, but overall, I would say the -- ahead with our positive outlook for the earnings capability. And then the rest seems to be a bit more political, right? I think different countries in Europe have reacted differently. Some are really worried just generally. And as you could see, against the will of the insurers that I actually think all the insurers could have paid the dividend, knowing them, but you can see different reactions by different countries. And I think some companies had no choice, but to cancel a dividend with whatever consequences that are. And I think investors will just look at these particular countries rather than the -- of course, impact the companies who are in these countries. But we didn't have that kind of issues here in Switzerland. We could -- relatively easy -- I mean also with the capital buffers we have, the situation we have, all of that, it was not particularly difficult to separate ourselves from the banking industry and make a case that we can pay the dividend. And as the crisis evolves and moves in the direction, we -- within what we thought they would, I think this, hopefully, will -- the attitude will change as people get more comfortable. So I'm not sure -- certainly for our dividend, I'd be relatively confident at this stage. And I would actually venture to think that some of the other dividends will just come back as people get more comfortable. So I'm not sure the dividend has lost its attraction. I still think it's a huge attractor and selling proposition for the industry. And I think another one will be that the industry is actually quite long-term sustainable, right? There's industries that are more frail to events like that. And this industry is less so, right? Insurance will be needed in 10 years, 20 years, 30 years. If you're in a production company, it's maybe not sure whether your product will be needed in 20 years or whether you have a strong competitor coming in. So to a certain extent, I also think there's a case for insurance and reinsurance in all of that.

Okay. Great. Okay. I'm going to take our first question from the audience. And that is, what will you do with the money from ReAssure in a couple of months in order of priority and criteria?

It's a wonderful problem to have, isn't it? Yes. So we'll see when we have it, right? I mean we're very -- so far, we're very certain about the process. Things seem to be going well. But who knows, it's a good problem to have once we have it. Whether there's business opportunities, what we can do with it. All I can say is I think we have displayed a high level of discipline with capital in the last, I don't know, 5 years, 10 years. We have never done any crazy acquisitions. There was lots on the table, but we never went for it because the prices were not attractive. So I don't anticipate doing anything crazy or that investors wouldn't like with the money. But I guess my hope is that there's enough business opportunities or attractive M&A at some stage. I don't think that's the case right now, but that's more Q3, Q4, maybe, thing if finally, people change their view about how much they need, they want to have for their assets. So I definitely hope there's going to be opportunities for capital deployment.

Cool. I guess. While we're on the sort of ReAssure topic, I mean, in Life Capital more broadly, I mean I think going back to the 1Q results, the underlying profitability of the open book businesses. So it's Life and iptiQ seemed to be weaker than some may have expected. I mean were there any specific drivers affecting that? And is there any change in how you're thinking about the strategy of this business post the disposal of ReAssure?

Not really. I mean we were not particularly surprised. Now Q1 was a bit complicated because of this announced sale of ReAssure and the way we now have to account for that so the market value loss in Phoenix went through the P&L, actually, even though we don't have Phoenix shares, it's quite complicated anyway. But economically, that sort of makes sense. And so that's the only thing I know that was a surprise. The business, I'm very excited about, this white labeling B2B2C solutions, iptiQ, they're going really well. It's just the way in GAAP you account for that is the more you grow, the more you're successful, the longer it takes until you're breakeven in GAAP, right? You have this upfront payment of commissions. And then over time, you create that. And if you grow more than that's -- it even takes longer. So any business panel, any primary insurer would be 6 years until you're breakeven. And so they're on track, but there's a series of start-ups, right? Some are a bit more mature, like Life & Health in Europe. But then as they are successful, we create new ones. So this is not going to be an earnings driver for Swiss Re in the next 3 years. I think it can be a value driver. It's highly interesting and it's attractive. And it's going to generate EVM profits soon. Obviously in the beginning, you have some fixed costs, so GAAP is probably not the ideal way to show that. But I'm very much believe in that. I think COVID-19, in that sense, is maybe an opportunity. You can see how some traditional insurers with sales force are struggling to have significant volume drops, whereas online insurers have increased -- demand increased. So the digital world probably gets a boost from all of that, and that's firmly the sector we're in. I think a lot of corporates are interested to potentially sell insurance, include insurance in what they have. So to me, it makes complete sense. Strategically, it could be a very big opportunity over the long term. And so yes -- no, I think it's unchanged in importance for the Swiss Re Group. And then also COVID is also an opportunity because all firms are in tendency taking their eyes off the innovation side. Everybody is back to core business and fixing things and cutting costs. And we definitely try to keep an eye on all of that because that can give us some advantages in this phase.

Okay. Excellent. I'm very conscious that we have less than a minute left. So I think that's probably a good place to wrap it up. Christian, thank you very, very much for joining us today. It was greatly appreciated and very interesting.

Thank you very much. And hopefully, everybody will be healthy and safe and follow the same path of Switzerland, including the nice weather. Thank you very much. Bye-bye.