Swiss Re reported a strong net income for 2007 of CHF 4.2 billion and a return on equity of 13.5%, despite the isolated mark-to-market loss from credit underwriting activities announced in November. Net income for the fourth quarter was modest at CHF 170 million.
Jacques Aigrain, Swiss Re's Chief Executive Officer, said, "Driven by an outstanding performance across our key businesses, we delivered the second-best result in Swiss Re's 1 44-year-history. Property & Casualty had its best performance ever and Life & Health improved on an already very strong prior year result. Investment activities developed positively, despite a generally difficult market environment. As a result, the Board of Directors is proposing to increase the cash dividend to CHF 4.00 per share, underlining our confidence in the future earnings of the firm."
For the full year 2007, Swiss Re reported a 9% decrease in net income to CHF 4.2 billion compared with 2006. Earnings per share were down 1 1 % to CHF 1 1.95. Premiums earned increased 7.3% to CHF 31.7 billion. Return on equity was 13.5%, compared to 16.3% in 2006. Shareholders' equity rose by CHF 1 .0 billion to CHF 31.9 billion. Book value per share increased 7% to CHF 92.00, despite the return of CHF 3.7 billion to shareholders in the form of dividends and through Swiss Re's share buy-back programmes.
Swiss Re's fourth quarter result was impacted by the isolated, yet significant, mark-to-market loss from credit underwriting activities announced in November. As of 31 December 2007, the mark-to¬market loss had not changed materially. Jacques Aigrain explained, "We took immediate action to strengthen the risk taking and supervision processes, and have ceased writing new structured credit derivative transactions, putting the existing portfolio into run-off. Swiss Re's very strong capitalisation, leading business position, financial flexibility and outstanding franchise are confirmed by superior financial strength ratings, which are among the highest in the industry and consequently allows us to pursue an active capital management approach."
Based on market movements as of 20 February 2008, Swiss Re estimates a further structured credit default swap mark-to-market loss of CHF 240 million. This change in value has been offset by positive developments in Swiss Re's investment portfolio.
Swiss Re confirmed that a putative securities class action complaint had been filed in the US District Court for the Southern District of New York against Swiss Re and various of its executive officers alleging false and misleading statements in connection with the structured credit default swap mark-to-market loss. It intends to vigorously defend itself against the action.
Outstanding results across the key business
In 2007, Swiss Re changed its segment reporting due to the integration of Financial Services activities into the Products function (please refer to the notes to editors section for more information on new segment reporting*).
Property & Casualty had an excellent performance, achieving a combined ratio of 90.2% (or 88.9% before unwind of discount). This resulted in an operating income of CHF 5.9 billion. Premiums earned grew 2% to CHF 19.0 billion. The main drivers were a strong performance, particularly in the property and specialty lines of business, as well as the first full-year inclusion of GE Insurance Solutions business. These results reflect the quality of Swiss Re's insurance underwriting despite the increased frequency of weather events in 2007.
Life & Health improved on an already very strong prior-year result. The return on revenues increased from 9.2% to 14.7%, as Swiss Re leveraged its position as a leading reinsurer in this segment. The operating income grew to CHF 2.7 billion, a 76% increase over 2006. New mortality and critical illness business was slightly lower as a result of increased competition, but this was more than offset by growth in the Admin Re° segment, as well as the excellent development of the variable annuity and longevity businesses.
Investment activities developed positively, despite a generally difficult market environment. In 2007, the investment portfolio grew 12% from CHF 194.5 billion to CHF 21 7.3, mainly due to Admin Re° transactions. On this portfolio, Swiss Re generated a solid return on investments of 4.9% net of mark-to-market adjustments on trading assets.
Outlook for 2008 and beyond
Swiss Re expects property and casualty market conditions to remain challenging in the short term. The January renewal season confirmed this trend, as almost all sectors showed signs of softening. In these conditions, Swiss Re will not pursue volume growth, but will instead continue to apply strict underwriting discipline. The January renewals account for 69% of Swiss Re's traditional treaty reinsunrance portfolio. Across the total traditional portfolio, premium volume for renewed business was reduced by 12%, including a slight decline in prices of 3%, with total premiums decreasing to CHF 8.8 billion.
In January 2008, Swiss Re entered into a significant quota share arrangement to increase the company's operational leverage by ceding a 20% share in new and renewed P&C business to Berkshire Hathaway. The agreement provides for a ceding commission that covers ongoing acquisition costs and a further fixed 14%. Overall, the agreement provides Swiss Re with both downside protection and upside flexibility, enabling the company to further advance its capital management. Depending on the future development of the cycle, Swiss Re anticipates a positive impact on both return on equity and earnings per share.
In Life & Health, rapid growth in new lines of business, such as longevity and variable annuity solutions, will offer further opportunities for attractive capital returns. The Admin Re° segment is expected to continue to develop strongly, as primary insurers seek capital- and cost-efficient solutions for managing closed blocks of business. Also, Swiss Re continues to see strong growth potential for its medical insurance business in Asia, primarily in India and China.
"With these opportunities in mind, we are confident in Swiss Re's growth prospects. We remain focused on our medium-term objective of 10% growth in earnings per share and have increased our return on ' equity target to 14% over the cycle. Our earnings power is strong and we look to the future with confidence", said Jacques Aigrain, Swiss Re's CEO.
At the Annual General Meeting on 1 8 April 2008, Raymond K.F. Ch'ien and Mathis Cabiallavetta will be proposed for election to the Board of Directors. Mr Ch'ien is chairman of CDC Corporation and chairman of the board of Hang Seng Bank. Among others, he also serves on the board of directors of the Hongkong and Shanghai Banking Corporation. Mr Cabiallavetta is vice chairman of Marsh & McLennan Companies and chairman of Marsh & McLennan International. He is also a former chairman of the board of UBS AG.
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