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Swiss Re Stages A Return to Profit

Posted on 18 Feb 2010

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Swiss Re returned to profit last year, in spite of substantial losses by the Swiss reinsurance group from reducing risk and strengthening its balance sheet.

Net earnings amounted to SFr506m ($468 million), compared with a SFr864m loss in 2008, when the group, which slipped from its position as the world’s biggest reinsurance group, suffered severe losses on its investment portfolio and continuing difficulties with two disastrous structured credit default swaps for an unnamed customer.

The damage prompted the departure last year of Jacques Aigrain as chief executive, and imposition of a “back to basics” strategy under Stefan Lippe, his former deputy, and successor.

Swiss Re’s latest figures underlined the gradual transformation of previous quarters, with a cleaned-up investment portfolio and reduced mark-to-market hits on higher-yielding but more risky investments.

“We have fully restored our capital position, significantly derisked and strengthened our balance sheet, and we have maintained the strong earnings power of our core business through underwriting profitability and cost discipline,” said Mr Lippe.

Further reassuring shareholders, Swiss Re said its capital was about SFr9bn above the level it believed was required for a double A credit rating. The group’s once gold-plated credit rating – an important factor for customers in the insurance industry – was downgraded during the financial crisis to single A plus by Standard & Poor’s, and has yet to be restored.

Mr. Lippe expressed confidence for the future. ”Few reinsurers can match the size and diversity of our portfolio. And fewer still can match our capital strength, our underwriting performance and our ability to innovate. Based on these strengths, we are well placed to reinforce our competitive edge.”

However, the group noted that the absence of large natural catastrophes, notably the mild hurricane season, and return of significant reinsurance capacity had delayed the hardening in pricing it had expected in the important January renewals period.

Nevertheless, reflecting its greater confidence, Swiss Re said it planned to restore the dividend, paying SFr1 a share as the “first step in returning to a normal dividend policy”.

Net profits last year were held back by impairments of SFr2bn, and mark-to-market losses of SFr1.9bn, mainly on corporate bond hedges. However, unrealized gains on the hedged bonds of SFr2.6bn were reflected in shareholders’ equity, which rose SFr5.7bn to SFr26.2bn at year end, compared with December 2008.

Fourth-quarter net earnings amounted to SFr403m, compared with a SFr1.7bn loss in 2008.

For the full year, operating profits in property and casualty rose 39 per cent to SFr3.8bn, while the combined ratio – an industry yardstick that measures costs and claims as a proportion of premiums – improved to 88.3 per cent from 97.9 per cent. In life and health, operating income climbed to SFr746m from SFr697m.

The impact of the shift to a much more cautious approach in investment policy was evident in a fall in the return to 1.8 per cent at the group’s asset management division – in charge of handling Swiss Re’s portfolio – compared with 4.7 per cent in 2008.