Posted on 26 Jun 2013 by Neilson
Swiss Re AG has concluded that in the current market it makes more sense to use its money to pay down debt rather than to invest.
The Zurich-based reinsurance giant said Monday in a prelude to its annual investors' day that it plans to reduce leverage by more than $4 billion by 2016, as it shifts focus from trying to wring returns from a relatively low-risk investment portfolio to cutting back on obligations.
Swiss Re Chief Financial Officer George Quinn said during a call with reporters that while the firm's debt load is relatively cheap to maintain thanks to low interest rates, "it's not free."
"We have to pay more on the money we've borrowed than we make on investments we've made," Mr. Quinn said.
The debt reduction is part of a broader streamlining push that Swiss Re hopes will result in as much as $300 million in cash savings by 2015. The overall effort does not currently include any "job cut, or job reduction program," Mr. Quinn said.
Swiss Re's remarks come as the company seeks to bolster overall returns, revamp a suffering U.S. life and health business dating from before 2004, and brace for any impact from recent severe flooding in Central Europe. Mr. Quinn said Swiss Re does not yet have an estimate for the impact of the flooding, which was the worst the region had seen in more than a decade.
German insurance giant Allianz SE recently estimated the gross impact on the firm due to the floods would likely be more than 500 million euros ($656 million), resulting in a net loss after reinsurance of roughly EUR350 million.
One cost Swiss Re is currently able to account for is related to bolstering the firm's life and health reinsurance lines. The firm said it expects to improve return on equity at the unit to between 10% and 12% by 2015, from around 5% currently. But rejigging the business in the short term will trim about $500 million in pre-tax profit from results in 2014, Swiss Re said.
A specific laggard for the life and health business has been the firm's U.S. life portfolio of business written prior to 2004. The firm is therefore in talks with clients about shifting responsibility for related risk, Mr. Quinn said.
Mr. Quinn said much of the $500 million in costs expected from the effort can be attributed to an arrangement with Warren Buffett's Berkshire Hathaway Inc. (BRKA). Under the terms of a recent settlement, Berkshire paid Swiss Re $610 million to re-assume responsibility for some renewable term-life policies sold in the U.S. before 2004--though the deal also capped Berkshire's responsibility for some of the policies covered at $1.05 billion, rather than the original $1.5 billion.