Swiss Re to pay off debt and take on more investment risk
Swiss Re said it would shift $3bn of economic capital into higher-yielding investments and pay down $4bn of debt by 2016 in an investor day presentation.
The company's CFO George Quinn said today (24 June) that it would look to grow regular dividends, but there was no mention of any significant capital returns to shareholders.
"The [company's] capital strength affords us competitive advantage," Quinn said. "We do not intend to give this advantage up."
Although Swiss Re can obtain debt cheaply in the current environment, Quinn explained that paying down leverage would bring about significant gains in conjunction with its move into higher-yielding investments.
Because its current conservative portfolio - which is heavily focused on government debt and cash - yields so little, even maintaining cheap debt comes at a cost.
It will pay down letters of credit, senior debt and, to a lesser extent, subordinated debt, while slightly increasing contingent capital facilities.
Quinn indicated that Swiss Re would shift $5bn into investment grade bonds and $2bn into equities.
Swiss Re said this strategy would particularly help its life and health reinsurance unit to boost returns. It plans to lift the unit's return on equity to 10-12 percent by 2015 from the current mid-single-digit range.
However, in the short-term returns will be hit by a $500mn charge to be taken in 2014 against a book of US life reinsurance policies written before 2004.
Earlier this year Swiss Re unwound a reinsurance agreement concluded with Berkshire Hathaway on this portfolio after the US firm disputed the contract.
Swiss Re also plans to achieve $250mn-$300mn of cost savings by 2015 compared to last year, which it said would come more from a focus on productivity than planned cost-cutting. It said the expense ratio should also benefit from its expansionary underwriting tactics.
In terms of expanding its underwriting portfolio, Swiss Re said it would target corporate solutions (insurance) business, longevity and health, and high-growth markets.
Premiums from high-growth markets make up 15 percent of the reinsurer's group premiums and it hopes to grow this business to make up 20-25 percent of premiums by 2015.
"This is a real present-day opportunity for profitable growth," Quinn said, pointing out that these markets make up 11 percent of its profits today.
Quinn agreed with recent market commentary that expanding alternative capital was expected to put pressure on nat cat margins.
However, natural catastrophe cover was also expected to be a fast-growing market.
"I think we'll see this when we complete the July 1 renewals," he added.
Quinn added that the trend for alternative capital would have a disproportionate impact on smaller reinsurers.