Swiss Re Sees Consolidation in Reinsurance amid Price Squeeze

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Swiss Re Ltd. Chief Financial Officer David Cole expects consolidation in the reinsurance market as oversupply of capital squeezes prices.

“Selling property and casualty reinsurance is becoming more difficult for us as well,” Cole, 53, said in an interview in Zurich this week. “In the current market environment where there is pricing pressure, we should recognize that it may lead to some consolidation in the industry.”

Reinsurers’ margins are under pressure as low interest rates push investors, such as pension funds searching for above- average returns, into their market. Below-average catastrophe claims have also left the industry, which shoulders risks for primary insurers in return for a share of the premiums, with abundant funds.

Consolidation could occur among insurers and reinsurers “who come to the conclusion that their business model is no longer appropriate given the current market circumstance and decide to transfer portions of their portfolio to other players,” Cole said.

Reinsurance rates declined in the main renewals of annual contracts in January, April and July due to the absence of major catastrophes and an oversupply of capital available for coverage, according to reinsurance broker Guy Carpenter. Rates have declined in seven of the last 10 years, according to the Guy Carpenter World Property Catastrophe Rate on Line Index.

China Acquisition
“We remain open to organic and inorganic growth and we could see opportunities similar to what we have done in the recent past or potentially larger,” Cole said.

Cole, a former CFO at ABN Amro, became CFO at Swiss Re on May 1, replacing George Quinn, who left to join Zurich Insurance Group AG.

Swiss Re’s corporate solutions unit, which sells insurance to corporate customers, last month agreed to buy a Chinese unit of the U.K.’s RSA Insurance Group Plc for £71 million ($120 million) following a deal in February to buy 51 percent of Columbia’s Confianza. Those purchases were part of strategy to shift capital to regions with higher premium growth prospects including Brazil, India, Indonesia, Mexico and China.

The group also agreed to buy the U.K. pensions business of HSBC Holdings Plc for an undisclosed sum in June for its Admin Re unit. Admin Re, one of its three business pillars, buys and manages blocks of closed life and health insurance funds, mainly in the U.S. and the U.K., no longer selling new contracts.

Excess Capital
Swiss Re wants to invest $3 billion of its excess capital at an 11 percent return on equity by 2015, the company said today. It does not disclose how much of the capital it holds.

“We’ve used our excess capital to invest in opportunities and we will continue to invest into our business,” said Cole. “Investments need to meet our financial hurdles. As a proxy we look for a return on equity of 11 percent.

Swiss Re slumped in Zurich trading yesterday after reporting second-quarter profit that missed analysts’ estimates, amid a decline in earnings from life and health insurance. Munich Re and Hannover Re also declined after reporting lower- than-expected earnings.