Swiss Re's profits soar - but its pricing tells a different story

Swiss Re's reinsurance arm just posted a really strong first half - 76.7% combined ratio, which basically means for every £100 they took in premium, they only paid out £76.70 in claims and costs. Big storm and disaster losses came in at US$169 million (£126 million), and other large losses at US$129 million (£96 million) - together using up less than 15% of the US$836 million (£621 million) they'd set aside for the year. So: quiet year for major losses, and profits flowed through nicely. Net income for the unit was up 18% to US$1.446 billion (£1.074 billion).

But here's the bit worth actually paying attention to: at the mid-year renewals, the headline price change was only down 1.2% - sounds mild. Once you adjust for the fact that they've also updated their view of how risky the business actually is, the real price cut was more like 5.3%. That gap matters - it tells you reinsurers are giving away more than the top-line number suggests.

There's also a profitability measure on newly written business that dropped 27%, from US$2.2 billion to US$1.6 billion (£1.19 billion) - so reinsurers are accepting thinner margins to hang onto business. Looking at the year so far, the volume of treaties renewed is up slightly (0.5%, totalling US$19.5 billion / £14.48 billion), but underlying pricing is down 4.6% once you strip out the loss-model adjustments. Swiss Re's own language points to there being so much capital sitting in the reinsurance market right now that insurers buying reinsurance (rather than the reinsurers selling it) are holding more of the negotiating power at every renewal this year.

Why this matters for brokers day-to-day:

• More reinsurance capacity tends to mean cheaper reinsurance for insurers, which usually flows through into more competitive pricing and capacity further down the chain - i.e. what you're able to offer clients - over the next few renewal cycles.
• Reinsurers accepting thinner margins is usually an early sign of a softening market more broadly - useful to know if you're in a renewal or placement negotiation right now.
• This softening isn't being driven by a lack of claims pressure elsewhere - under 15% of the catastrophe budget was used, so there's no build-up of losses forcing rates back up. Anything that hardens the market this year would more likely come from something like a bad hurricane season.

A few other things from the results worth knowing:

• Across the whole group, net income was up 9% to US$2.833 billion (£2.10 billion), keeping Swiss Re on track for its US$4.5 billion (£3.34 billion) full-year target. They paid out over US$17 billion (£12.6 billion) in claims in total during the half.
• Corporate Solutions - the part of Swiss Re more likely to come up if you're placing larger commercial risks - grew net income 14% to US$490 million (£364 million) and improved its combined ratio to 86.1% from 88.2%.
• Their capital buffer (a regulatory measure of financial strength) sits at 264%, comfortably above their own target range of 200% to 250% - so plenty of capital sitting behind the business.
• Swiss Re's CEO struck a slightly cautious note despite the good numbers, given hurricane season is approaching its peak - worth keeping in mind, since a rough back half of the year could reverse some of this softening.

Bottom line: there's plenty of capacity out there, reinsurers are quietly cutting margins to hold onto business, and nothing in the claims numbers is pushing the other way yet. That points to continued competitive pricing in the primary market through the rest of the year - assuming hurricane season stays as quiet as the first half has been.

One thing worth double-checking: how much of this actually shows up in the specific lines you're placing varies a fair bit by class and by carrier, so it's worth testing against what you're actually seeing in your own markets rather than assuming it applies evenly across the board.