Swiss Re calls for government backstop as virus drags income further into the red

July 31, 2020. Print article

executives on Friday pushed for a public-private insurance partnership for scenarios resembling the coronavirus pandemic, after COVID-19 decimated the group’s half-year results, particularly in property and casualty.

The Zurich-based reinsurer and insurer reported a net income loss of $1.1 billion through July 1, reflecting $2.5 billion in virus-related claims and reserves, after gaining $953 million during the same period last year. Earnings per share were negative $3.92, compared to $3.19 a year ago.

Excluding the impact of COVID-19, the global company would have logged a net income of $865 million, “demonstrating the strong underlying performance and a strong investment result,” Group Chief Financial Officer John Dacey said in prepared remarks.

The results point to the need for the government to step in to provide a backstop for reinsurers, which could then facilitate risk distribution and claims settlement, Group Chief Underwriting Officer Edi Schmid said.

“The real correction needs to happen on the P&C side,” he said. “The discussions are going well in many markets, and Swiss Re is part of that.”

COVID-19 will likely go down as the third-largest catastrophic loss event for the property and casualty insurance industry, the Swiss Re Institute found, with costs ranging from $50 billion to $80 billion. Only Hurricane Katrina in 2005 and Hurricanes Harvey, Irma and Maria in 2017 were more expensive.

Similar public-private schemes have been floated in the United States, United Kingdom and European Union, as companies grapple with the potential for even steeper virus-induced losses depending on the outcome of a slew of policy proposals and litigation. 

In one consequential lawsuit that was heard this week, U.K. financial regulators brought a test case to the High Court to determine which policy wordings should leave insurers on the hook for business interruption claims. 

Insurers have maintained that their policies largely exclude coverage for incidents that don’t involve physical damage. To clear up any room for dispute, Swiss Re executives said that as policies came up for renewal and April and July, they adjusted the wording to exclude COVID-19.

“It’s not just us,” Swiss Re Group CEO Christian Mumenthaler said. “The whole industry is working toward that.”

Most of Swiss Re’s coronavirus-related losses in the first half were due to $973 million in business interruption claims, but the company also logged significant losses for mortality and event cancellations, with $544 million and $484 million, respectively.

For business interruption especially, Swiss Re booked most COVID-19 losses as incurred but not reported, estimating reinsurance losses based on conversations and policy analyses with 100 clients that comprised 80% of total exposure.

The majority of the pandemic’s damage will have been accounted for during the first half, Swiss Re posited, partly because countries in Asia and Europe have demonstrated that it’s possible to contain the virus without imposing another lockdown.

“Only a tiny fraction” of the business interruption claims have come through so far, Mumenthaler said.

However, Dacey acknowledged that there could be additional “modest subsequent charges” in areas where the company put up reserves, including business interruption. 

More events could also be called off — event cancellation is the only area where the company was overexposed in the half, Schmid said — and the company could see a slide on credit and surety lines “to the degree that there are significant defaults, and those defaults end up not being managed by some of the government interventions,” Dacey said.

After suspending share buybacks for the year, Dacey said the group is in a “robust” capital situation, aided by the completed sale of subsidiary ReAssure Group to Holdings. That “key strategic milestone” brought the company GBP 1.2 billion ($1.6 billion) in cash, as well as shares in Phoenix representing a 13.3% stake.

“Our dividend is secure, and we shouldn’t have to worry about at least maintaining the dividend on a going-forward basis,” Dacey said. “We’ve got the capital; we’ve got the underlying earnings.”

Swiss Re, which employs 14,500 people in 80 offices around the world, reported total revenues of close to $19 billion in the first six months of 2020, down from $24.4 billion a year prior. It earned a little over $19 billion in premiums, up from $17.8 billion in the first half of 2019.