Global reinsurance firm Swiss Re provided an overview of its growing Alternative Capital Partners business this morning, explaining that annual revenue from alternative reinsurance capital and insurance-linked securities (ILS) business are on track to reach US$100 million.
As we explained earlier this year, Swiss Re’s alternative capital and ILS assets under management reached a new high of $3.2 billion, with an expansion into the sidecar and ILS fund platform.
As the level of assets under management has increased, the fee income generated by these ILS-related activities, which alongside Swiss Re’s business in structuring, arranging and selling ILS through its Swiss Re Capital Markets unit, now sees the business earning a significant contribution from its third-party reinsurance risk capital.
The Alternative Capital Partners business has become a much more central area of business at Swiss Re, allowing the reinsurance company to partner with large institutional investors and share with them the results of its underwriting performance disasters, while benefiting from protection against peaks of peril and also earning fee income.
This morning, the reinsurer noted that Alternative Capital Partners (ACP) business has grown rapidly at Swiss Re.
Swiss Re noted “the continued expansion of the natural catastrophes business, which returned an average combined ratio of 75%”, and taking into account the favorable development of the previous year, sees the average combined ratio in ten years for Swiss Re’s catastrophe portfolio to fall to 69%.
For any ILS investor, a large, globally diversified real estate catastrophe risk portfolio that offers an average combined ratio at this level over a ten-year period is a very attractive investment proposition.
Swiss Re noted today that this performance review of the catastrophe reinsurance underwriting portfolio has “increasing interest from third party financial partners”.
Reinsurance remains central to Swiss Re’s strategy, the company explained this morning, suggesting that the opportunity for third-party investors to partner should not diminish as the reinsurer now incorporates alternative sources of capital into its underwriting capabilities. through its ancillary quota-share structures, as well as its investment management unit Swiss Re Insurance-Linked Investment Management Ltd. (SRILIM) and its fund platform 1863 ILS.
After revealing this morning that annual royalty income generated from ACP activities has now exceeded US$80 million, Swiss Re has set a more ambitious target to raise it to US$100 million, saying that while continuing to execute its strategy in the ILS space, that the revenue level of these operations is now approaching.
Swiss Re’s ACP commission revenue has now increased by 215% since 2018, to approximately US$85 million.
It also comes from revenue from asset management fees, commissions and service delivery fees.
More specifically, commission income is generated by proportional disposals via disposal and profit commissions, which is relevant for the Swiss Re sidecar platform, as well as commissions based on assets under management in the framework of the ILS fund operation, as well as structuring fees for the work of Swiss Re Capital Markets. in the sector of catastrophe bonds and insurance securities (ILS) in the broad sense.
Swiss Re views the growth of the ACP ILS business as essential to its strategy of being the leading underwriter of catastrophe risk, as third-party capital helps the reinsurer manage its net risk exposure, ceding excess risk to investors.
A commission, or spread, is earned between taking risk and hedging, with benefits well beyond commission income, as Swiss Re recognizes significant capital relief for its key peak risk exposures, such as tropical cyclone risk in the United States thanks to its risk sharing with ACP investors.
Swiss Re’s reinsurance and ILS fund sidecar platform now contains 267% more assets than in 2018, resulting in a corresponding 146% increase in shortfall relief for its main risk of peak hurricane risk in the United States during the same period.
In addition, the ACP business also provides capital relief, using it as leverage to improve diversification, which has an increasing impact on Swiss Re’s capital structure as Swiss Re’s capital management activities third-party reinsurance are developing.
Subscription capital relief allocated to ACP businesses has increased by 48% since 2018, Swiss Re said today.
The alternative capital market is an area in which Swiss Re aims to remain a leader, with its own investment activities having increased, as a main investor, and the Swiss Re Capital Markets unit remaining third in our ranking of banks and catastrophe bond brokers.
With Swiss Re’s assets under management growing strongly in its sidecars and ILS funds, the benefits for the group growing in terms of deficit and capital relief, while remaining a leading player in the world From the ILS Catastrophe Bond and Capital Markets organization, it seems likely that the annual fee and current income rate will hit the $100 million mark before too long.
That’s a significant contribution to Swiss Re’s overall profit and if you could assess the other benefits, hedging, deficit and capital relief as well, the monetary value of the ILS business of Alternative Capital Partners and Swiss Re Capital Markets is particularly important for the company.
Swiss Re appears to be finding a level of scale and balance for the use of third-party capital that now adds to the company’s bottom line and will help support its growth in underwriting natural catastrophe risk.
As we’ve explained many times before, this is the holy grail for those leveraging third-party capital within their reinsurance business, finding a strategy and scale that adds significant net income benefits. , while allowing for more growth, plus downside protection as well.
The point of engaging with ILS and financial market investors is either to leverage their risk appetite to help you hedge your portfolio, or to find a sweet spot where working together delivers the returns they want, along with growth and other benefits for your own portfolio. .
This is where Swiss Re is clearly heading at the moment, with the benefits of ACP and ILS steadily growing for the reinsurer.
Combine this with a partnership approach, and an alternative capital business within a traditional reinsurer can also begin to offer additional growth opportunities, while there is significant chance to realize synergies in other areas as well. of the business, as in the case of Swiss Re, through other business lines and even with the Corporate Solutions unit.