Swiss Re determined to further de-risk asset portfolio, reinforce capital position
Swiss Re reported a net loss for 2008 of CHF 864 million and a return on equity of -3.4%,
driven by investment losses. In spite of extreme financial market turbulence and a significant natural catastrophe burden faced by the insurance industry, the core business delivered strong underwriting results. The Group has taken extensive measures to further de-risk its investment portfolio and reinforce its capital position.
Stefan Lippe, Swiss Re’s Chief Executive Officer, said: “This result is clearly disappointing. Although our Property & Casualty and Life & Health business segments continue to perform extremely well even in these adverse conditions, the result has been impacted by investment losses.”
He added: “We have already taken extensive measures to de-risk the investment portfolio and to further protect the long-term financial strength of the company. These measures are all contributing to building a stronger firm for the years to come.”
Restore and maintain balance sheet strength
For the full year 2008, Swiss Re reported a net loss of CHF 864 million compared to CHF 4.2 billion net profit in 2007. Earnings per share were CHF -2.61 compared to CHF 11.95 in 2007 and return on equity was -3.4% compared to 13.5% in 2007.
Shareholders’ equity decreased to CHF 20.5 billion from CHF 31.9 billion at the end of 2007, primarily due to the loss for the year, unrealised losses on investments, and the impact of exchange rate movements. Book value per share decreased to CHF 60.96 compared to CHF 92.00 at the end of 2007.
As announced on 5 February 2009, Swiss Re has taken measures to reinforce its capital position in order to take advantage of business opportunities. Swiss Re was able to secure a private capital solution in a short period of time. Subject to shareholders’ approval, Swiss Re will issue CHF 3 billion of convertible instruments to Berkshire Hathaway Inc. This is evidence of the soundness of Swiss Re’s underlying business offering. The Group will propose to Swiss Re reports net loss of CHF 864 million for the full year 2008 Strong underwriting performance offset by investment losses Swiss Re determined to further de-risk asset portfolio, reinforce capital position shareholders to increase the authorised share capital by not more than 180 million shares. At this time, the Group does not intend to conduct a rights issue.
Swiss Re will intensify and accelerate its efforts to further simplify the organisation, improving efficiency by delivering globally aligned services.
Given the need to further strengthen its capital position, the Board proposes to reduce the dividend to CHF 0.10.
Strong earnings power of core business
The earnings power of Swiss Re’s core business remains strong. Property & Casualty and Life & Health generated operating income of CHF 4.5 billion in 2008.
Swiss Re’s Property & Casualty segment delivered superior underwriting performance for the fourth consecutive year, achieving an excellent combined ratio of 97.9% (96.1% excluding unwind of discount) for the full year. Due to the impact of cycle management
and a higher combined ratio, operating income was CHF 2.7 billion,a 39% decrease compared to 2007.
Life & Health achieved a benefit ratio of 85.5%, reflecting a strong underwriting performance. Operating income decreased to CHF 697 billion, a 47% decrease compared to 2007, mainly driven by non-cash items.
Asset Management delivered a strong performance in difficult market conditions with a total return on investments of 0.6% for 2008. Operating income was CHF 5.9 billion, a decrease of 30% compared to 2007.
Determined to further de-risk asset portfolio
Swiss Re is continuously reducing risk in its investment portfolio through a combination of sales and hedging. As of the end of 2008, more than 56% of Swiss Re’s investment portfolio consisted of cash, short-term investments, treasuries and government-backed
instruments. The extensive hedging programme on the corporate bonds portfolio provided a benefit of CHF 2.6 billion in 2008. The securitised products in the Asset Management portfolio remain of high rating quality.
Those products no longer offered by Swiss Re are now being managed by the Legacy unit. These products include the structured Credit Default Swaps (SCDS), the portfolio Credit Default Swaps, Financial Guarantee Re and former trading activities. As indicated in our preliminary 2008 results communication on 5 February 2009, these activities produced a mark-to-market loss for the full year of approximately CHF 5.9 billion, including mark-to-market losses of CHF 2.0 billion for SCDS.
Outlook
Swiss Re’s strong earnings power is supported by an improving outlook in terms of client demand and reinsurance pricing for both Property & Casualty and Life & Health. Demand for reinsurance has increased as insurers become more risk averse in the face of a reduction in their capital base.
The 2009 January renewals resulted in an increase in rates of around 2%, leading to a volume increase of around 6%, at constant foreign exchange rates. Stefan Lippe said: “Our clients have given us a clear vote of confidence, reflected in the positive outcome of the January renewals.”
Swiss Re continues to manage the cycle actively with growth in the lines with the highest price increases, such as Property, and reduced volume in the areas where pricing is less attractive, namely Liability, Motor and Accident. The Group expects the trend of improving prices to continue and extend to other products and markets. As life insurers around the world face significant challenges, Swiss Re anticipates a growing need among clients to release capital from their in-force portfolios through Admin Re® or other reinsurance solutions.
The company will continue to focus on its consistently strong underwriting performance, which will be the key to success in a low yield environment. For 2009, Swiss Re is targeting a treaty year combined ratio of 95% assuming a normal level of natural
catastrophes.
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