Swiss Re Returns to Profit After Fewer Writedowns
Swiss Re CEO Stefan Lippe
Chris Ratcliffe/Bloomberg
“The reinsurance industry is expected to experience moderate but stable growth over the coming years,” said Swiss Re CEO Stefan Lippe, seen here.
“The reinsurance industry is expected to experience moderate but stable growth over the coming years,” said Swiss Re CEO Stefan Lippe, seen here. Photographer: Chris Ratcliffe/Bloomberg
Swiss Reinsurance Co., the world’s second-largest reinsurer, swung to a quarterly profit after a year-earlier loss when it wrote down risky investments.
Net income was $812 million in the three months through June after a $342 million loss a year earlier, the Zurich-based company said today in a statement. That beat the $422.2 million average estimate of six analysts surveyed by Bloomberg.
Swiss Re posted 2.1 billion Swiss francs ($2 billion) of charges last year after receiving a 3 billion-franc capital injection from Warren Buffett’s Berkshire Hathaway Inc. While asset management income rose 160 percent as lower impairments boosted investment returns, property and casualty earnings slumped on natural catastrophe losses and profit at its life and health business fell from the preceding quarter.
“It is just a little bit disappointing at the operating level,” said Michael Huttner, a London-based analyst at JPMorgan Chase & Co. “It is a balance between the book value and the overall investments which are doing super well.”
Swiss Re fell 2.9 percent to 47.53 francs in Zurich trading, the most since May 25, valuing the company at 17.6 billion francs.
Operating income at the reinsurer’s asset management unit jumped to $1.23 billion from $472 million, with a total return on investments of 13.2 percent. That performance won’t be repeated in the next quarter, Swiss Re said.
No Repeat
“The overall result is way above expectations and I would not expect to see that in the third quarter,” said Chief Financial Officer George Quinn, commenting on the asset management business.
Excess capital dropped to $10 billion from about $12 billion at the end of March after a dividend payout of 1 franc per share in April and because of the dollar’s strength, Swiss Re said. The reinsurer is bidding to regain its AA rating, which Standard & Poor’s cut in February 2009, citing the firm’s dwindling capital.
Repaying Berkshire Hathaway will cost a “bit less” than $3.5 billion, Quinn said in May. Swiss Re, which turned to Buffett after writedowns and losses of $8.3 billion in 2008, will incur a premium if it repays the capital before March 2011.
Larger rival Munich Re yesterday reported a 1.7 percent increase in second-quarter net income to 709 million euros ($937 million).
Catastrophe Claims
Spending on claims and costs as a percentage of premiums, the so-called combined ratio, worsened to 102 percent from 89.4 percent a year earlier on natural catastrophes. Swiss Re reiterated reported claims of $630 million from a quake in Chile and $200 million from the Deepwater Horizon oil rig explosion.
“The surprise in non-life here is they were more exposed to smaller” natural catastrophes, said Huttner at JPMorgan, which cut Swiss Re to “overweight” from “super overweight” on Aug. 2. “Given that we’d like to think that Swiss Re tends to be better at combined ratios than its peers, it is a bit disappointing.”
Operating income at the property and casualty unit dropped 49 percent to $455 million after the losses. Swiss Re said it expects a net of $935 million in natural catastrophe claims this year.
Even though BP Plc, which didn’t buy insurance, will cover the majority of expenses linked to the clean-up, the disaster may cost insurers as much as $3.5 billion, the biggest man-made insurance loss since the Sept. 11 terrorist attacks in New York, according to Swiss Re.
Hurricane Season
Insurers’ losses from natural catastrophes totaled $22 billion in the first half of the year, more than double the average for the period since 2000, Munich Re said last month.
The 2010 Atlantic hurricane season, which runs from June through November, may be the most active since 2005, which was the worst on record with $115 billion in damage, according to Moody’s Investors Service. The current season has seen three named storms so far with one, Alex, reaching hurricane strength.
Swiss Re, which sells coverage to primary carriers to guard against the cost of major claims, said the market prices for property and casualty reinsurance fell 3 percent during the July 1 renewals, when most reinsurers renew contracts with customers in parts of the U.S. market, Australia and Latin America.
“The low interest rate environment continues to reduce margins and this trend will continue if interest rates remain at these low levels,” Quinn said on a conference call.
Operating income of the life and health unit fell to $142 million from $245 million in the first quarter.
“Underlying, the result does not look great, neither on non-life than on the life & health side,” said Stefan Schuermann, a Zurich-based analyst with Vontobel Holding AG.
To contact the reporter on this story: Carolyn Bandel in Zurich at cbandel@bloomberg.net
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