Swiss Re reports improvement in excess capital at the AA level to CHF 4.5 billion – Net loss of CHF 381 million for the second quarter of 2009 – Significant progress made in de-risking the Legacy portfolio
In the second quarter of 2009, Swiss Re further increased its capital strength and estimates that its excess capital at the AA level has improved to CHF 4.5 billion. The Group also made significant progress in de-risking its Legacy portfolio. Solid underlying earnings in the core business were offset by mark-to-market losses on hedges and impairments. This resulted in a net loss of CHF 381 million for the quarter.
Stefan Lippe, Swiss Re’s Chief Executive Officer, said: “During the second quarter of 2009, our core business, despite the reported loss, continued to deliver strong underwriting results and solid earnings power. Most importantly, the measures we implemented to improve our capital base have proven to be effective, considerably increasing our excess capital at the AA level. We have also made significant progress in de-risking Legacy with the termination of substantially all of our portfolio credit default swap contracts. This powerful combination increases our confidence in delivering on our targets.”
Net loss despite solid underlying earnings
Swiss Re reported a net loss of CHF 381 million for the second quarter of 2009, compared to a profit of CHF 564 million in the same period of the previous year. Earnings per share were CHF –1.13.
The net loss was mainly driven by three factors that offset solid underlying earnings in the core business. First, by mark-to-market losses on hedges on corporate bonds of CHF 1.1 billion; the unrealised gains on these corporate bonds of CHF 1.9 billion are reflected in shareholders’ equity but not in net income. Second, by impairments of CHF 0.6 billion, primarily on securitised products. Third, while Swiss Re’s credit spreads improved considerably in the quarter, US GAAP requires Swiss Re to record the effects of its own credit spreads in certain financial liabilities. This resulted in a charge of CHF 431 million on net income for the quarter.
Shareholders’ equity increased to CHF 23.8 billion at the end of June 2009, compared to CHF 23.6 billion at the end of March. Annualised return on equity was –7.4%, compared to 2.9% for the first quarter of 2009. Basic book value per common share was CHF 60.69, compared to CHF 61.39 at the end of the first quarter of 2009. As of the end of June, Swiss Re estimates that its excess capital at the AA level improved to CHF 4.5 billion.
Property & Casualty delivers excellent underwriting result
Property & Casualty operating income increased to CHF 1.0 billion in the second quarter of 2009, compared to CHF 0.9 billion in the second quarter of 2008. The combined ratio improved to 89.4% (or 87.6% excluding unwind of discount) compared to 91.0% (89.0%) in the same period of the previous year. This result is primarily due to disciplined underwriting and strict expense management.
Life & Health impacted by markets
Life & Health reported an operating loss of CHF 10 million for the second quarter of 2009, compared to a profit of CHF 535 million in the prior year period. While premium and fee revenue increased slightly compared to the prior year period, the result was strongly impacted by the discontinued variable annuity business, mainly due to the mark-to-market impact of improvements in the Group’s own credit standing. As Swiss Re’s credit spreads narrowed in the quarter, this resulted in a mark-to-market loss of CHF 375 million. The benefit ratio increased to 78.6%, compared to 77.5% in the same quarter of 2008. This increase primarily reflects the prior year favourable mortality and morbidity experience within the traditional life and health segments. The benefit ratio continues to be satisfactory.
Asset Management continues to focus on de-risking
For the second quarter of 2009, return on investments decreased to 0.5%, compared to 2.9% in the prior year period, mainly due to the impact of hedges on corporate bonds and the impairment charges. Swiss Re maintained a cautious stance on corporate bonds and increased the allocation to lower risk assets such as cash, short-term investments and government securities in its investment portfolio.
Legacy risk significantly reduced
Legacy generated a net operating income of CHF 71 million for the second quarter of 2009. Legacy also took a significant step in its de-risking plan, terminating substantially all of its remaining portfolio credit default swap contracts and decreasing corresponding notional exposure in its Legacy portfolio from CHF 13.9 billion at the end of March 2009 to CHF 842 million at the end of June 2009.
Conditions in the reinsurance market continued to improve in the second quarter of 2009. Swiss Re sees the strongest immediate improvements taking place in some life segments, especially the US, and many natural catastrophe markets. In several other segments, the softness of the market has slowed but has not yet really reversed. In the July 2009 Property & Casualty renewals, Swiss Re achieved a rate increase of 4%, reflecting the shift in its reinsurance portfolio from Casualty lines towards more profitable Property non-proportional business, as well as a gradual hardening of the market. More importantly, though, the company succeeded in raising long-term price adequacy. Overall, the renewals in the first six months of 2009 demonstrated that Swiss Re’s client franchise is strong and that the company has sufficient capacity to provide the capital relief its clients need.
Fully in line with operational efficiency target
Several major milestones in the company’s efficiency programme were achieved in the second quarter of 2009. Swiss Re optimised its global office network and initiated the closure of 14 of its 73 offices across the globe to serve clients more effectively, while consolidating support functions in regional hubs. These measures translated into running cost savings, before restructuring costs, of more than CHF 300 million in the first half of 2009. Net savings, after restructuring costs, are now expected to exceed CHF 150 million in 2009, compared to our original target of CHF 100 million.
Swiss Re has succeeded in increasing its capital strength and remains a strong partner for its clients. For Property & Casualty, the company expects further modest rate increases. The company is likely to surpass its combined ratio target of 95% for the underwriting year, provided that natural catastrophe events remain within expectations. However, the economic environment remains uncertain and the company’s investment and Legacy portfolios remain exposed to market volatility. The financial market volatility and the shift towards lower risk investments, which allowed Swiss Re to reduce its exposures significantly, may adversely impact future earnings.
Stefan Lippe concluded: “We believe the underlying operating trends are positive and we have the ability to allocate significant capacity to lines of business that offer an appropriate return on our capital.”