Lower than expected catastrophe losses in the second quarter helped fuel nearly $1 billion in net profit for Swiss Re during the period, and a 16 percent jump in profit to $2.1 billion for the first half.

Reporting the figures last week, together with first-half combined ratios of 84.5 for property/casualty reinsurance and 88.7 for Swiss Re’s commercial insurance arm, Corporate Solutions, the group’s chief financial officer, John Dacey, explained that results also included some big second-quarter loss reserve boosts—$300 million of incurred-but-not-reported reserves for slow-to-emerge natural catastrophe losses and $650 million to top off U.S. liability loss reserves.

“All these reserving actions are consistent with our ambition to enhance the overall resilience of the portfolio,” Dacey said.

A slide shared during an investor and analyst presentation revealed that the first-half combined ratios currently remain comfortably below targets of 87 and 93 for P/C reinsurance and Corporate Solutions, respectively, while the half-year profit of $2.1 billion puts Swiss Re on track to meet it’s $3.6 billion-plus target for the full year.

Introducing the results, Group Chief Executive Officer Andreas Berger said all of Swiss Re’s businesses (which also include life reinsurance) are “actually well positioned” to meet the targets. He also amended his statement with “a bit of caution.”

“We’re well aware that we have a large part of the year still ahead of us. And especially in respect of natural catastrophes, we’re entering the hurricane season as we speak,” Berger said, flagging the third quarter as the most active part of most years with respect to nat cats and highlighting Swiss Re’s dedication to “remain vigilant and focused on our goals.”

Diving into the numbers, Dacey noted that Swiss Re’s total of large nat cat losses for the first half came in at $100 billion—roughly $600 million below the budgeted expectation. The favorable outcome played out against a backdrop of $60 billion of insured natural catastrophe losses across the industry, he said, reporting a figure previously announced by Swiss Re Institute. Dacey noted 90 percent of the industry losses were caused by secondary perils.

“Given the low amount [at Swiss Re], and the fact that there is some uncertainty of where the ultimate claims will end up, we decided to put up an additional $300 million of IBNR reserves for the current year in the second quarter. This allowance obviously helps in case of heightened loss activity in the remainder of the year where we seasonally expect larger reinsurance-relevant events on average, but also will deal with the potential creep of losses that we might have seen in the first half of the year,” he said.

Dacey said the $300 million allowance are the bulk of $0.5 billion of reserve actions in the property and specialty lines, explaining that Swiss Re has also added to selected prior year losses, which include Italian hail storms from last year.

During his opening remarks, Dacey didn’t say much about the reason for the $650 million increase in U.S. liability reserves beyond stating the number and Swiss Re’s ambition to maintain resilience going forward. During the Q&A portion of the conference, however, he did respond to a question about the accident years impacted by the reserving action noting that Swiss Re got notifications from primary companies “about either new losses or increased sizes of losses coming through” during the first and second quarters. “And obviously we took that partly into account. But if I wasn’t clear we did increase the IBNRs in U.S. casualty as well,” he said, adding that the majority of the of the $650 million relate to the problematic accident years of 2014 through 2019. Swiss Re also boosted reserves for these accident years during 2023.

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Swiss Re also added “a little bit on some earlier [accident] years’ assumed positions. And we decided to top off some of the late years as well just because of the overall size of the reserves that are sitting there….If you think that you’re adding to the IBNRs it would make sense to distribute that also where the physical mass of reserves are sitting,” he stated.

“Overall, we saw the 650 as a way to continue to build our position in the range of what’s a reasonable level of reserving and we remain comfortable at the end of the second quarter with where we’ve landed,” Dacey said.

Asked what casualty vs. property combined ratios look like after the loss reserve additions, Dacey said those figures would be provided for the full year. “What I could tell you is any time you add 650 million to reserves, it’s going to be an ugly number. But I think the question is what’s going on in the underlying. And there, we take some comfort from the continued price increases that the primary industry is getting in these lines of business,” he said, adding that on Swiss Re’s renewals, “casualty is one of the places [where] we’re putting [in] the largest load for staying on risk…. Those price increases are materially up.”

Overall, premiums for the global casualty book shrunk 3 percent during recent renewals. But that “underestimates the exposure shrinkage, which is clearly double-digits at this point,” Dacey said. “We continue to believe that we’re getting better pricing for the risk that we stay on here. And if we can’t get that better pricing, we walk away.”

As for the nat cat reserve boost, asked if prudent reserve cushions might become a regular event, Dacey said he would not necessarily expect that the same type of actions a year from now.

“As we were adding up the numbers…, we were frankly surprised at the relatively low set of nat cat losses that we had in the first half of the year” relative to the industry’s $60 billion figure. “We also noted that number of our competitors were putting up larger numbers for some of these events during the first half of the year. I think our view is, linked a little bit to the reality that we had on the Italian floods last year, that there is some risk of creep.”

Considering the “fairly remarkable events that occurred,” Swiss Re thinks “there’s value in setting aside this relatively large IBNR for the potentially late reported claims, he said, referring to floods in Emirates in April and in Brazil in May.

Scenario A or B?

An analyst later asked Dacey to try to pinpoint why Swiss Re’s nat cat losses came in lower than most everyone else’s, positing two scenarios: Scenario A), that Swiss Re’s selective underwriting approach was better than peers at moving the reinsurer away from exposure to secondary perils; or Scenario B), that late-reported losses of $300 million are highly likely to emerge.

“I think there is real discipline in our P/C Re team to remove themselves from the high-frequency events, a nearly complete removal from aggregates, reduction in the quota/share positioning….We’re sitting on excess of loss layers where we think we’re well-rewarded for taking real tail risk,” he said. The big events this year—the various flood events (Emirates, Brazil, Germany and Switzerland) and riots in New Caledonia—were “all important losses for the primary industry” but for Swiss Re, losses from those events haven’t advanced over a $20 million hurdle that would classify them as large nat cat losses. Even named U.S. hurricanes have not damaged Swiss Re’s results. “So I think there is real quality in the underwriting and a removal from frequency layers at Swiss Re,” Dacey said.

“We’re also growing that book. It’s not that we’re shrinking to greatness on property and nat cat. We are writing more of this business as we continue to increase prices at each renewal round,” he stated.

During his introductory remarks, Dacey spoke about business growth during July renewals. Highlighting different trajectories for property and U.S. liability casualty, Dacey said, “We remain cautious on the casualty,” noting that during the renewals Swiss Re pruned the U.S. liability book by 26 percent, bringing the year-to-date reduction to 21 percent. In contrast, property and specialty premiums grew 11 percent year-to-date, he said.

Pressing Dacey on the casualty book, the same analyst wondering why Swiss Re’s property book was surprisingly good, asked for more details on the motivation for higher U.S. liability IBNRs. Was it that Swiss Re noticed an external trigger that prompted the action, or is Swiss Re in engaging in to opportunistic reserving at a time when catastrophe losses aren’t marring results, he asked.

“There were some notifications about more significant losses during the first half of this year, and that’s made us think harder on some of the sublines of umbrella casualty and commercial motor, which continues to be problematic within U.S. liability,” Dacey replied. “There might be some other places as well.

“But we saw the opportunity to reinforce the IBNRs in these lines and effectively took it. So $650 million is a big number. We get that. But we also get [that] the combined ratio in Q1 was 84.7, and the combined ratio in Q2 was 84.4 and for the half year, 84.5. And our net income at $2.1 billion leaves us on track for hitting [our] financial targets, and with a strong first-half performance.”